Navigating America's Foreign Policy in an Uncertain World

RICHARD N. HAASS: Good evening. We're starting uncharacteristically late because there was such a crowd that we had to accommodate the throngs.

Welcome, one and all, to the Council on Foreign Relations, and thank you for being here tonight. And I gather there's not just those of you here in the physical sense, but in Washington in the telephonic sense. And the subject, as everyone, I expect, knows, is navigating America's foreign policy in an uncertain world. This is not a meeting about the Navy; broader than that.

The timing could hardly be better, given the events in the Middle East, not just in Egypt and Tunisia but beyond, and then not just simply the events in the Middle East, whether it's continuing questions in Europe as to the Eurozone, ever bigger questions about China and its role, Afghanistan, Iraq, that set of issues; the whole panoply of global issues that's out there, and then the domestic issues here at home that, in many ways, raise challenges or questions about this country's ability to act in the world. And we'd be hard-pressed to come up with two better people to talk about it.

On my immediate left here is Joseph Nye, who's the university distinguished service professor at Harvard's Kennedy School of Government, the author of a lucky 13 books, most recently "The Future of Power." And Joe is simply, I believe, one of the wise men of American foreign policy, and he's a former good colleague when I was also at the Kennedy School. And he's a great friend, personally but also of this institution. He serves on our board.

Gideon Rachman is the chief foreign affairs correspondent of the salmon-colored newspaper -- and for those of you who get it electronically, you'll have to figure it out; if it's salmon-colored in that case, you're in trouble -- and the author of "Zero-Sum Future: American Power in an Age of Anxiety." And, shockingly enough, in the spirit of mercantilism, both books are for sale. (Laughter.) And no other books are for sale. This is a tightly controlled market here tonight.

This meeting is on the record, so anything said will be saved for posterity. We do have people, as I said, joining us over the airwaves. So if you do have your electronics on, please shut them off.

I'll spend a few minutes lobbing softballs at these two foreign-policy heavyweights, and then I will simply get them lazy and sloppy, and then you can really hammer them in the way that they want to be challenged.

Let's start out with a baseline. Here we are. It's early 2011. It's roughly 20 years since the end of the Cold War, roughly a decade -- this September will mark the 10th anniversary of 9/11.

What's going on in the world? I don't mean in Egypt or anywhere, but if one were, in a sense, painting with broad strokes -- Joe, why don't we start with you -- what are the principal broad strokes that help describe the world now that we're seeing?

JOSEPH S. NYE JR.: I argue in my book that there are two great power shifts going on in the 21st century. One is power transition from West to East. Sometimes it's called the rise of China. It's much more than that. It starts with Japan and includes Korea, China and others.

That is something we're familiar with. We've seen this before in history. We've got to manage it well so we don't get into a Thucydides trap or a World War I trap. I think we can manage it. But the other is much more interesting, which is not power transition from one state to another, but what I call power diffusion.

And that's the way in which technology has empowered all sorts of non-state, non-governmental actors to do things which previously were in the domain simply of states or large multinational corporations, if they had a big enough budget. And that means that while governments are the central actors on the stage, the stage is much more crowded.

And the best illustration of that, since you asked for 20 years, is 20 years ago the Worldwide Web had just been invented. I was at the Munich security conference over the weekend, and William Hague gave a speech, and he pointed out in the speech that in 1995, less than 20 years, there were only a few million people on the Worldwide Web. And today there are 1.7 billion. And if you asked how do we understand change in the 21st century, power diffusion seems to me even more than power transition.

HAASS: Gideon, would you disagree with any of that?

GIDEON RACHMAN: A bit of it. I mean, I agree with the first point that I think the major trend is this transition of power from West to East, and also, to some extent, from North to South with the rise of Latin America and so on. And I agree with Joe that I think it should be, in an ideal world, a manageable process.

I think I see rather more tensions coming out of it, though, than perhaps Joe does. I mean, in my book I talk about -- I see the financial crisis of 2008 as a kind of dividing line. And the period that you mentioned, from the fall of the Berlin Wall to 2008, is roughly 20 years.

And I call it an age of optimism for the reason that I think that it was a period when globalization created a set of common interests between the major powers of the world that allowed them all to be reasonably satisfied with the way the world was going, so that China and India were becoming much more prosperous. It was an age of optimism in the European Union with the creation of the Euro, doubling in size of the EU, and also an age of optimism here in the U.S. It was the tech revolution, the unipolar moment. You know all of that.

I think, with the financial crisis and the shift in economic fortunes, which, in a way, was going on before the crisis but has been kind of both crystallized and accelerated by the crisis, financial crisis, it's less clear that the global system is operating in ways that everybody's happy with, so that, for the West, I think there is now real anxiety about the rise of China.

And within that, as Joe says, that's part of a larger phenomenon, the rise of new powers. And I think that, on the other side of the Pacific, in China, you have got a shift, a new mood, a slightly more assertive mood, which we've seen in the last year in a number of foreign-policy clashes. And I think that, as a result, we're potentially entering a more conflictual age. So that's what I see as the major trend.

HAASS: Possibly. And one of the -- we've actually gotten about five minutes into this meeting, and I want to compliment both of you for not having mentioned the "D" word -- decline. But you have both mentioned the rise of China.

So one of the questions is not simply the absolute rise of China, but one of the phenomena of this world is also the relative -- and let me underscore the word relative -- decline of the United States and what you might call the OECD world -- Europe, Japan, whatever.

And your books have a very different perspective on this. You're essentially something of an anti-decliner in terms of either what's happening or what's likely to happen, and I think Gideon is more of a "This is reality, like it or not." Is that fair?

NYE: I think it's true that I am skeptical about the current conventional wisdom. I mean, Americans go through cycles of belief and decline. I mean, after Sputnik, the Russians were 10 feet tall. After Reagan's budget deficits, the Japanese were 10 feet tall. After 2008, which was a huge disruption, the Chinese are 10 feet tall. And a majority of Americans, actually, in one recent poll thought China was bigger than the U.S. now. It's simply not true.

If one looks ahead, not at psychology but at the reality, China has a lot of very real problems. And we have -- I mean, there are demographic problems. The labor force starts to turn downward after the growth in the labor force after 2015. They haven't solved the participation process. India was born democratic. China, as it gets to per capita income around $10 (thousand) to $12,000, is going to have to deal with a demand for participation. Notice I didn't say democracy.

HAASS: Right.

NYE: Demand for participation. They haven't quite figured out how to do that.

HAASS: Even if that's true, even if both China and India and some of these other places stumble a bit and their growth is halved -- let's just argue that -- there's still that relative decline of the United States.

NYE: Oh, if you think of decline and talk about relative rather than absolute, I think the phrase -- I think Fareed Zakaria first started it -- the rise of the rest is a reality. And if you think about the particular role of Asia, you know, in 1800 Asia was half the world's population and half the world's product. By 1900, it was half the world's population and 20 percent of the world's product. And it was essentially the Industrial Revolution.

And what we've been seeing basically since the last half of the 20th century, starting with Japan, and now with then Korea, now with China, and soon to be India, is Asia returning to normal proportions.

HAASS: But do you think the story -- I'm going to press you one more time. Do you think the story of what we're seeing and likely to see over the next few decades is more one of kind of Asia returning, if you will, to its normal position, or do you think that it also is something about the West and the United States and Europe -- and let's include Japan there, if you will -- not able to sustain the sort of trajectory it had; that the West has actually run into, largely for internal reasons, systemic challenges that place now a ceiling on its growth or capacities?

NYE: Well, I think the answer to that is no, to give you a quick answer. But it depends on what we do. There is no one future. We can do things that shoot ourselves in the foot. But by closing ourselves off with trade or immigration and so forth, we can do it.

Let me give you an anecdote from Lee Kuan Yew. I had lunch with him. And I cite this in the book. He said, "You know, the Chinese have 1.3 billion people to draw upon -- a huge pool of talent. The Americans have 7 billion people to draw upon. And what's more, when the Americans take these people, they recombine them in a way which creates diversity and creativity. And the Chinese will remain limited by ethnic Han nationalism." That's the source of my optimism.

Could we spoil that? Absolutely. There are some areas where we overreact to a terrorist incident, close off immigration, become protectionist, and shoot ourselves in the foot. I don't think we will, but we always could.

HAASS: Aren't we kind of doing that now? Well, we're doing that now.

NYE: We're trying, but we don't know how. (Laughter.) I mean, fortunately -- (laughs) -- fortunately, we're not very good at it. You know, go back to the Know-Nothing Party of the 19th century. You could have said the same thing.

HAASS: We no longer have a particularly active trade expansion policy, and we've reduced by more than half the number of visas for high-skilled immigrants.

NYE: Yeah. And I think that, as the economy recovers, I think we're going to recover some of that too.

RACHMAN: Well, to get back to the beginning of your conversation, I think the comparison that Joe makes with previous episodes of panic about decline is a very interesting one, the whole Soviet and Japanese threats. And I think it's worth -- it's a good way of trying to think about China. What is the comparison?

And I think that the Chinese challenge is more real, because if you think about the Soviet challenge, we now know, in retrospect, that, of course, the Soviet economy was a basket case. We didn't know that at the time because they weren't trying to compete on world markets. We know, however, that China is capable of growing at 9 to 10 percent a year, becoming the world's largest manufacturer, et cetera. So it clearly hasn't got that economic flaw, that massive inability to compete.

Similarly, Japan is number one; the famous book by Ezra Vogel. In retrospect, of course, that doesn't seem to me to ever have been plausible for simple population reasons. They would have to have been twice as rich as the average American to have a larger economy than China -- than the U.S.

China -- the sheer scale of the country, the fact that it's four times as many people, means that I think it's pretty inevitable that at some point the Chinese economy will be larger than that of the U.S. Indeed, the latest projection in The Economist was 2019, really not very --

HAASS: Can I interrupt you for one second?

RACHMAN: Yeah.

HAASS: Does that really matter in terms of world power, given the denominator of population, given that everything that goes on in China is divided by 1.3 billion? The fact that it may have an economy in 25 years that's the same size as the United States, is it that significant when our population is going to be one fourth the size?

RACHMAN: Yeah, I think it is. I mean, I think that there's no absolute kind of read across; that, you know, you have "x" size of economy equals "x" amount of power. Obviously it's more complicated than that. But I think you can already see the way in which Chinese economic power now is changing the world.

So, to give you a modest anecdote, you know, there's a sovereign debt crisis in Europe. The Chinese are going around quite visibly, and in the company of photographers, saying, "We'll buy Portuguese bonds. We'll buy Greek bonds." And, you know you think back to the Marshall Plan. You know, a long time ago it was the Americans who had the money.

And the Chinese, I think, are making a point. And they're not doing this out of -- for charitable reasons. There is an element of influence-buying and demonstration of power. And I think, in a broader sense, I think one of the really interesting things that's happening in Asia now is that its strategic and economic interests of a lot of the countries in the region point in different directions, so that for Japan, for Korea, for Australia, their major trading partner now is China. Their security relationship is with the United States.

And I think there's a tension there. And my guess is that unless the Chinese massively overplay their hand and scare their neighbors even more than they're doing now, in the end those economic ties will help to create bit of a -- (inaudible).

NYE: Could I agree and disagree with Gideon? I agree in the sense that size of economy gives you economic power, and that's important. But per capita income is a much better measure of the sophistication of an economy. And while the Chinese will equal us somewhere in the 2020s on size, on per capita income it's not going to be till 2040, 2050.

RACHMAN: Oh, I agree with that, but I think that if you look at the disposition of power -- the use of power in the world -- I mean, Luxembourg already has a higher GDP per capita than the United States, but there are not very many of them, so they're not going to be very powerful.

NYE: But the other point that I would make is that if you look at power, which was Richard's question, GDP is one measure. And per capita GDP is a refinement of that. But you also -- I mean, what I do in my book is look at military power, economic power and soft power.

On military power, the Chinese aren't going to equal the U.S. for a couple of decades or more. And on soft power, the Chinese can't equal the U.S. until they change their domestic political system. Hu Jintao told the 17th Party Congress, "We need to invest in soft power." That's very smart for a country whose hard power is rising and scaring its neighbors. You want to make yourself attractive through soft power. But they're having a very hard time doing it. Every time they have a Beijing Olympics or a Shanghai exposition, every time they lock up a Liu Xiaobo, they shoot themselves in the foot.

And so if you take the dimensions of power, all of them, I just don't see the Chinese equaling the U.S.

RACHMAN: Well, I mean, actually, boringly, can I agree with you? I mean, I think that, you know, when we talk about the rise of China, I'm not talking about China displacing the U.S. as the most powerful country in the world even when its economy is larger than that of the United States, because there are all these other metrics that you mentioned. But what I do think is that you will see a constraint on American power, growing constraint on American power. So the unipolar moment is over. And I think that the U.S. increasingly will find it difficult to get its way.

Let me give you just a couple of concrete examples. The climate-change talks were a very interesting thing, where America turns up, kind of assumes that the world's democracies will be on its side, and, in fact, you know, when it comes down to it, India, Brazil, they're with China. And those kinds of incidents, I think, will multiply.

NYE: Well, I think we would agree that the unipolar moment is over. I never thought it existed in the first place.

RACHMAN: Right.

NYE: I thought that was a Krauthammer myth, which led us into very deep trouble in Iraq, because people believed it. It's just as great a mistake to believe in American ascension as in American decline. But I do think that the point that is worth remembering is that Asia is not one thing. We're seeing the rise of Asia.

But if you look at Japan, you look at India, you look at Vietnam, these countries want the U.S. That has a huge effect on the balance of power. It's as though Canada and Mexico wanted a Chinese military alliance because of their fear of the U.S. We don't threaten our neighbors because we have soft power along with our hard power. China frightens its neighbors because it isn't able to generate that soft power to go with its hard power.

RACHMAN: I mean, I think that's right, but I think that for the reason I mentioned this divergence between economic and strategic interests, the debate is open and ongoing among the neighbors of China and the allies of the U.S. as to where they look. And I think you could even see it in the past year and a half in Japan, where you have Prime Minister Hatoyama coming in, tilting quote noticeably towards China, then replaced by another prime minister who tilts back to the United States.

And I think you will see more and more of these oscillations, because it's a slightly -- it's a difficult and uncertain position. And since you quoted one Singaporean, I'll quote a more junior one, Kisho Mavobani (ph), who, of course, represents a particular Asian's point of view, but, you know, worth listening to.

And he said to me, "Well, the thing is that we know that we do want America to stay in the region in some ways, but we know that China will still be here in a thousand years' time. We don't know America will still be here in a hundred years' time." And I think that question of can America sustain its presence in the Pacific, because of the kind of financial pressures that Richard and others have written about, is a real live question.

HAASS: Can I just break in here for a second?

NYE: Oh, sorry about that. (Laughs.)

HAASS: This is why -- this is why unemployment is so high, because presiders are now unemployed.

Let's just raise one other part of the world, because so much of this has been about Asia. But so much of the news -- and in some ways, if Asia is the most successful theater of the world, at least the most dynamic, the Middle East is the least successful, and in many ways the least dynamic.

What does that tell us, then, about the future, about diffusion of power, about American -- because China is not a significant presence in the Middle East. On the other hand, what we're seeing in many cases are the limits to American power. Is that not something of a glimpse into the future, where a world of diffused power is much more than a pretty unattractive sight, where you've got some fairly aggressive medium-size states?

You've got all sorts of non-state actors, whether it's the Hezbollahs or al Qaedas that are incredibly dangerous, running amok. Our ability to persuade countries to reform tends to be rebuffed. Our ability to persuade countries to compromise at the negotiating table tends to be rebuffed.

Is this not another vision, if you will, of the future?

NYE: Oh, absolutely. I mean, if -- I mean, this is the point why I stressed diffusion of power rather than transition of power among states as the key question.

If you think of the information revolution, it's quite remarkable. The price of computing power went down a thousand-fold in the last quarter of the 20th century. If the price of an automobile had gone down as rapidly, you could buy a car today for five dollars.

What that means is all sorts of individuals and organizations, non-state organizations, are suddenly empowered. They can do things that previously reserved the governments with big corporations. And that's what we're seeing in the Middle East today. The information revolution has provided more information to more people than any time in history.

And what that's done in the Middle East is good and bad. If, on the optimistic side, the old view we had, which you either had the autocrats or the Islamist extremists -- no, there's a middle. And this profusion of information has created a middle. And what's more, it's provided technology and gadgets so that they now can coordinate, whether it's Twitter or Facebook and so forth, to actually do things.

But that middle is a very diverse group. And how we play this could turn out very bad or very good. So it's not necessarily pure pessimism, but it's not pure optimism either. And it's going to be very difficult for a government -- as we see, as we watch the Obama administration trying to walk this tightrope, you have to deal with the governments and hard power, because they're in power, but you also have to realize it's not just whose army wins; it's whose story wins. You have to have a narrative that reaches civil society at the same time. And walking that tightrope is hard, and we've seen some wobbling.

RACHMAN: Yeah. No, and I think it's a very plastic moment. It could turn out -- it could be the best thing that ever happened to the Middle East if, you know, you do actually get a transition away from these old autocracies. But of course, you know, things could go massively wrong as well. That's obvious.

I think, actually, although, in a way, this has been a demonstration of this kind of new cyber world, I think there's a slight danger of exaggerating it. You know, some of the talk is as if there was never a revolution before Facebook. How did the French storm the Bastille without Twitter? It's incredible. (Laughter.)

HAASS: Le Twitter. (Laughter.)

RACHMAN: But -- so, you know, while it's very interesting the way it's shaping events, you know, revolutions have occurred before. And I think, to make another sort of old-fashioned point, I think it's also a reminder of the importance of states still, because what's the question that's preoccupying us? How is this going to turn out? The question is, who ends up in control of the state? And that's what's making people's hearts flutter in the White House or whatever? That's how we'll, in a way, define how the revolution turned out.

HAASS: If you're talking about this world in the Middle East we just described, it's pretty rough around the edges; more broadly, a world of diffuse power. Are you optimistic about the states and others essentially coming to some sort of understanding or consensus about how to govern it? Do you see -- in general, if you were looking at the trends towards order versus disorder, in terms of what you might call the management of the globe, do you -- I mean, you had the failure at Copenhagen. You've got world trade talks essentially on life support, if that. You've got, at best, half-hearted efforts to deal with North Korea and Iran's nuclear programs. And one could go around some other issues as well.

Do you see grounds for optimism that, as this power builds and spreads -- while this information and other technologies get diffused, what gives you a sense that the world would be better for all this?

NYE: Well, I think it's not automatically going to be better. There are lots of things that can go wrong. But I think it'd be a mistake to assume that it's totally unmanageable. There's a lot more governance -- not government -- governance in the world than we realize. Even the failure at Copenhagen was followed by modest rapprochement at Cancun.

And there is a question of -- I mean, the nonproliferation treaty, we have major challenges from North Korea and Iran. But let's face it. Jack Kennedy said there were going to be 25 nuclear-weapon states by 1975, and, in fact, there are nine.

So, you know, it's glass half-full, half-empty. But I think it's a mistake to say, "Oh, because its power is diffusing, we're all going to hell in a hand basket." A lot will depend on America and American power. This is why the declinist view that we're all finished is so dangerous, because it makes us feel draw inward; don't do anything. If the largest country doesn't take the lead in providing these public goods to deal with these kind of challenges, nobody else will.

HAASS: Right.

NYE: And that's why being accurate about the assessment of American power, neither Pollyannish nor too pessimistic, is essential to deal with the kinds of problems you're talking about.

HAASS: Some would argue -- Mike Mullen was here the other day, the chairman of the Joint Chiefs of Staff, and he has been on the record as saying that the greatest threat to American power is the economic foundations and essentially the debt.

And you've been -- you know, you're at the Kennedy School of Government and you're a keen observer of the American political process. Do you have optimism that this country will, if you will, deal with the debt before the bond market deals with us?

NYE: I -- nobody -- if I knew the answer to that, I'd be very wealthy.

HAASS: But it's still -- none of us knows the answer. The question is --

RACHMAN: The question of the bond market --

NYE: Yeah, but I think not before the 2012 election. But it's interesting, if you look at a longer perspective on American politics, the tea party movement really is at 20 percent which is dedicated to solving the deficit problem. And if you look at the Simpson-Bowles commission, they proposed some very sensible things that can be done.

I think the problem is, how do you put that package together? And probably you're not going to put it together until after the 2012 election. But, you know, in principle, one can see a solution. Will it happen or not? I mean, nobody knows. But I would think that it's in the president's interest to grab this issue and make it his issue in 2012.

HAASS: You're an observer of -- you're not an American, but you're an observer. Sometimes observers see us better than we see ourselves. De Tocqueville and some others had some views about that; Mr. Bryce.

RACHMAN: I'm happy to play de Tocqueville with you. (Laughter.)

HAASS: So looking at us, do you share Professor Nye's optimism that essentially, two years down the road, we're more likely or at least fairly likely to get our domestic house in order?

RACHMAN: Well, look, I'm sort of -- if I think about modern-day politics, it makes me kind of pessimistic. If I think about the kind of sweep of history, I'm more optimistic. And what I mean by that is you look at the mess in Washington, the polarization of the debate, it does look pretty hopeless. I can't see them reaching some sort of agreement to reduce the deficit.

It may be that America, you know, has more time before the bond markets reap revenge on it. I mean, if you look, the Japanese seem to have managed to get to some incredible level of debt-to-GDP ratio. They're still going. So -- but what I mean about being optimistic about the great sweep of history is that although, you know, my book has plenty of gloom in it, I did, at the end, try to draw back and remember that, you know, there have been other big crises of liberal economies and liberal politics, most notably the 1930s, you know, when things were much, much worse economically, when the threats overseas were much worse. And many people did say, you know, actually, liberal democracy doesn't work, I mean, even in our own societies, and moved off to the extremes. And actually, in the end, they were wrong.

So, you know, one has to kind of keep the faith, even if you can't quite see your way through within the next three to five years.

HAASS: Well, on these positive notes, let me open it up. If you'd raise your hand, wait for a microphone, and then identify yourself. And please keep your questions to a single one and be succinct. We would be forever grateful.

Yes, sir.

QUESTIONER: Hi. My name is Khalid Azim.

Is there such a thing as moral power? And, if so, does the U.S. have it?

NYE: Well, my view is clearly yes, that -- in both senses, that there is moral power. That's what I mean when I talk about soft power. Power is the ability to get others to do what you want. You can do it through coercion -- sticks -- payments -- carrots -- or traction and persuasion. And having a moral position moves people. It attracts them. It persuades them. When we live up to our ideals, which we don't always, we do indeed have that moral power. And that's what soft power is about.

RACHMAN: Can I just quickly answer that? I mean, I think that -- I think -- I agree that America does have enormous moral power. I think there's -- one thing we might underestimate, though, is the extent to which the Chinese have some of that as well.

I mean, I think one of the interesting things at Copenhagen was the way they were able to position themselves as the spokespeople of the developing world, to say, "Look, you guys consume this enormous amount of energy and you're now saying to us we can't aspire to the same sorts of lifestyles as you. Who are you to say that?" And that had a big resonance.

HAASS: All the way in the back. Is that Mr. Rubin?

QUESTIONER: Yes.

Thank you, Richard.

I guess this is more for Gideon than Joe, but if you could both address it. Why, in drawing a straight line of Chinese growth in the economic side, you don't take into account the many people who believe that China's ability to stay stable politically takes a big chunk out of that straight line and raises very serious questions when you throw out where China will be in 20 years economically?

Using a statistic about economics, there's a whole bunch of other factors, including the huge labor unrest and the battles against the center and all of those things. So could you address the stability of China and how that would factor into this straight line of economic growth? Thank you.

RACHMAN: That's obviously an incredibly important point. And you're right; straight-line projections are usually wrong. And China has enormous problems in environmental, political transitions to go through.

However, you know, I don't think that even if one factors in a great deal of instability in China, that will be enough to kind of -- I mean, we, in 10 years' time, 15 years' time, say, "What were we thinking about when we thought China would be a great power?" They may be a very troubled power, and their growth may slow down. But simply given the size of the country and the momentum of economic growth over the last 30 years, I think they will be bigger players in the future.

Just to give you an analogy, I mean, if you look at the rise of Germany in the 1870s -- I don't mean that this means war, but in an economic sense, you know, this is a country that goes through enormous turmoil. They go through the defeat in the First World War, hyperinflation, Great Depression, Second World War. By the 1950s, they're actually still one of the most developed economies in the world.

So you can have enormous instability. But if you've got a country that's somehow got the hang of economic growth, is quite large, is quite productive, it doesn't mean that the whole thing gets derailed at some point.

HAASS: All the way in the back. Yes, sir.

QUESTIONER: Professor Nye --

HAASS: You have to introduce yourself.

QUESTIONER: Chung Weihua (ph).

Professor Nye, I'm wondering if you graded Obama demonstration in how it uses power, according to what you said in the book. What score you would give in its dealing with Egypt in the past two weeks and in dealing with China in the past year?

NYE: Well, I think when Obama came into power, he had to restore the loss of American soft power that had occurred in the Bush years. This is not a political judgment. It's simply reporting what polls say. And Hillary Clinton talked about smart power, which is the ability to do both hard and soft power.

Obama gave a series of speeches in Turkey, Cairo, to the U.N. and elsewhere, and tried to restore that soft power. And the polls show that some of that worked. But when you look at the longer term, you have to ask, do the actions reinforce the words? And some of these, it's too soon to know.

I think, frankly, when the Obama administration came into office in relation to China, they were a little bit too naive, too optimistic. The Chinese, in fact, thought the Americans were in decline. So as Obama tried to compromise with China, they basically thought, "Ah, it proves our point. The Americans are in decline." I think the net effect of that was bad for China. Its hubris led it to spoil its relations with Japan, Vietnam and India, and also with the United States. I hope that's now rectified after the Hu Jintao visit and that China is back to the old Deng Xiaoping advice of keep a low profile.

On Egypt, I think they're wrestling with this dilemma I described earlier, which is how do you use this soft power that was expressed in the Cairo speech while also realizing that when you're talking about balancing Iranian power or preserving the peace process and not seeing a war with Israel, you've got to deal with the government.

And that is a very difficult tightrope to walk on so that you're dealing with government, which is essential for the hard power, but also creating a narrative so you don't alienate civil society, which is the source of stability and attraction for the long run. And I think they've wobbled a bit on that tightrope, but, in my opinion, they haven't yet fallen off.

HAASS: Sir.

QUESTIONER: Stephen Black (sp).

The United States exercises enormous power -- you might call it dumb power, perhaps -- by being the largest debtor, having the largest and richest markets, being the largest consumer. If the United States -- as the fat boy in the boat, if the United States doesn't take the most active leadership in global governance, is there a formula to maintain or to create stable global governance without the U.S. taking the leadership role?

RACHMAN: Well, I mean, I think, you know, we referred to this before, that obviously the U.S. is the most plausible leader. I mean, I think one of the reasons that the G-20 is now a slightly troubled organization is because America is the only obvious leader, but it's not quite powerful enough.

And so, you know, at the time of the financial crisis, everybody said -- the analogy people looked for was the new Bretton Woods. They said, "We need a new Bretton Woods." And yet if you look back at the situation when Bretton Woods happened, the U.S. was incomparably the most powerful country in the world. Essentially -- I mean, if you read the Skidelsky book on Keynes, the Americans basically designed the institutions and then were able to impose them on everyone, including the British, who, although they didn't much like it, weren't in a position to fight back.

And I think that in this current situation, America is the most powerful country in the world, but it's not able to push everybody in the way that it was, say, at the time of Bretton Woods. So you tend to get deadlock, you know, on a number of issues -- climate change, global economic imbalances.

The most they'll do is they'll agree they need to agree, but they can't get there, because the national interests come into play, so that although there's a recognition that there's a common problem that can only be solved internationally -- and that is a good starting point on a range of issues -- when they actually get down to discussing the nuts and bolts -- as I say, climate change, global economic imbalances, nuclear proliferation -- people's interests come to the fore and then they get deadlock and you don't get an agreement.

NYE: Let me just agree with what Gideon just said, but also warn us all against what I call the golden glow of the past. In 1945 to '50, Americans had a nuclear monopoly and nearly half of world product, and yet we still weren't able to prevent the so-called loss of China or to win the Korean War. So this idea that once we were this hegemon that could do whatever we wanted, and today we're down in this poor --

HAASS: That was the first unipolar --

NYE: Yeah, this is the golden glow of history.

HAASS: Sure, all the way in the back.

QUESTIONER: Thank you very much. Mahesh Kotecha.

You know, my question is, what is the great benefit of being the hegemon? And what's wrong with having multipolar world? We believe in the U.S. in checks and balances. Why not worldwide?

NYE: Well, in my book, I argue that power isn't good or bad per se. It's like calories in your diet. Too much is bad for you. Not enough is bad for you. And so the idea -- I don't think the United States should try to be a hegemon. I think it's a terribly imprecise and rather useless and confusing word.

But I do think that if the largest country doesn't help to take the lead in organizing others to produce public goods, it's very hard to see smaller countries doing it. So why should we concern ourselves about American power? Not to be able to say, "I'm number one." It's not a Super Bowl. It's a question of can you produce the kind of order, faced with the diffusion of power that Richard talked about. And without the United States working on that, I don't see other countries being able to do it.

HAASS: Why is that? Why is it other countries can't do it or won't do it? Why is it that the United States is one of the rare countries that thinks in those kind of global -- what you academics would call global public goods and things like that? And the Chinas and the Indias and even Europes at times don't think in those terms. What's it about this country?

NYE: Well, it's not about this country. Actually, the theory of collective action or public good, as Mancur Olson points out, that when you have a large number, it's a lot easier to free ride rather than bear the burden. The reason the largest bears the burden is because they're going to see the benefits of the burden. For the small, their actions are so insignificant that it's easier to free ride.

China is now getting to a position analogous to where the United States was back in the 1920s and '30s. After Britain no longer was providing these goods, Americans were free riders. It's not our culture. We used to love to free ride. And it produced the '30s and World War II.

So what we've got to do now is get the Chinese and others to start pulling their share.

RACHMAN: I mean, I think that it's interesting. There's divergence of opinion in Europe, I think, between elites and the public as to whether we actually want to be a major power. So you go to Brussels and they say, "Well, we must mobilize our power and we must -- you know, it's terrible that Europe's not more of a player in the world."

But actually, one of the reasons Europe's not more of a player in the world is that there is no constituency for, say, increased military spending. Europe wants to just kind of put the blanket over its head. And it was sort of summed up for me where actually I saw a French civil servant. There was a discussion of the kind of rising tensions in the Pacific. And the French civil servant asked the Chinese diplomat there, "What is Europe's role in there? Are we irrelevant?" And then he said, "I hope the answer is yes," because he didn't -- you know, "It suits us to let the Americans kind of look after it."

HAASS: Lots of hands. Sure.

QUESTIONER: Thank you.

We've spoken a lot about --

HAASS: Introduce yourself so we all know who you are.

QUESTIONER: Sorry. Matt Hooper (sp).

We've spoken a lot about the rise of the East, but I'm also curious about power diffusion, which Professor Nye mentioned earlier. What are your short-term thoughts -- next two years, three years -- when governments can still so quickly control things like the Internet, not necessarily our long-term implications, but how are these next few years going to be affected by this government-Worldwide Web relationship?

NYE: Well, I have a chapter in my book on cyber power. And what it points out, that it's a mistake to be a cyber optimist or libertarian, the view that it's transforming the world. Governments are still able to control the Internet, but it gets leakier and leakier. Egypt shut off the Internet at considerable expense. I mean, if you want to run a banking system or a trade system, you pay a high price when you do that.

But there are a lot of sources of information. Land lines weren't cut off, and you could also pick up a cell phone and use this device "Speak to Tweet," so you called a number in Europe or elsewhere and you were able then to get a Twitter account and a tweet on the Internet.

So the point is that there are ways to work around this. Governments still have sovereign power over the parts of the Internet that are within their borders, and it's silly to think that that is gone. But it's getting leakier and leakier. Even the great fire wall of China is getting leakier.

HAASS: Sure.

QUESTIONER: Nick Branford (sp), Lazard.

How do you think the West should handle Iran?

NYE: Your turn. (Laughter.)

RACHMAN: Thank you.

HAASS: Deftly, I think, is the word.

RACHMAN: Well, you know, I'm not privy to the intelligence. There's this endless debate, you know, about how close are they to the bomb. I mean, I think I've been hearing for the last 10 years they're one or two years away and that now there are people actually saying they've been very seriously disrupted by Stuxnet and so on. So a lot depends on that question, which, you know, I don't have the answer to.

I mean, if you think that they're a few years away perhaps because of the cyber disruption, then the only sensible thing to do is to play for time. We now know, because of the aborted green revolution, this is an unstable country, a country that could change, or the regime is unstable. You know, clearly we don't want a military conflict with them if it can be avoided at all.

So I think you just monitor them and cross your fingers that the country changes.

HAASS: I'm not only calling on men, but so far, at least, not one woman has raised her hand since this meeting began. So I know I'm going to get criticized afterwards for my selection bias, but I want to point out that it's not a selection bias. It's a --

NYE: There we go.

HAASS: (Laughs.)

QUESTIONER: Min Tufain (sp) with the U.N. Foundation.

You mentioned earlier, Mr. Nye, about -- Professor Nye -- that maybe it's not part of the U.S. culture to take the lead in the world and that we have been a free rider in the past. Well, what about American exceptionalism? Is that something that we need to -- do we need to have that sense for us to lead in the world?

NYE: American exceptionalism is interesting. In one sense, President Obama is right that every country thinks it's exceptional. But it's also true that American exceptionalism really goes back to our founding. I mean, you know, the city on the hill, which Reagan transformed into shining city on the hill, was John Winthrop.

I mean, this is 17th century. We believe that we've broken away from that bad old world back there in Europe. Remember, these were British colonists who believed that, because of -- let me call them strange religious beliefs, but whatever. I happen to come from a Puritan background. My family got here in 1639, so I can criticize these people. (Laughter.)

But they had very odd, in the Church of England sense, religious beliefs. And we were exceptionalists in that sense. And that has its bad side. It makes us think we're holier than thou or better than others. It also has its good side. It means that we think we have to stand for human rights and liberty, that there is something about us that, even though we don't always live up to it, we have to keep it. And that's the source of our soft power.

Think back to the Vietnam period, when people were demonstrating in the streets around the world against America, and people thought America was absolutely terrible. What were the demonstrators singing? Not the Internationale of the communists -- Martin Luther King's "We Shall Overcome." That's real soft power. And that grows out of American exceptionalism.

HAASS: Sure.

QUESTIONER: Hi. Lane Greene from The Economist. Hi, Gideon.

HAASS: I think The Economist should ask the Financial Times a question. (Laughter.)

QUESTIONER: I apologize --

RACHMAN: (Inaudible) -- The Economist.

NYE: Let's get ugly here.

QUESTIONER: A long-time correspondent of The Economist, but my question is for Professor Nye. Catch you later, Gideon. (Laughter.)

My question is about -- we've talked about soft power a lot. And the word public good, the phrase public good, has come up quite a bit. And the Internet has been talked about quite a bit as well. We've given -- we've diffused more power, the United States has, by the creation of the Internet and the Worldwide Web, and even now Facebook and Twitter.

Do foreigners think about these as American products when they get on them, whether to communicate with one another not about America, or when they get on these products to take up cyber arms against America? Why doesn't our gift of this diffusion of power to the world redound to our credit more than it actually does?

NYE: Well, I should be very nice in answering The Economist's question, since you called my book "rigorous and convincing." (Laughter.)

HAASS: We'll see if your answer is now.

NYE: I think the danger is thinking that somehow cyber is all good. It's good and it's bad. I mean, it can be used for malevolence against us. It can also be used for Internet freedom, which I think, in the long run, helps us.

One problem for American policy is we haven't quite figured out how to deal with this. Hillary Clinton gave a wonderful speech last January after the problem between China and Google about how we stood for Internet freedom. And then along comes Wikileaks and we want to censor. You know, we haven't figured out how we fit all this together. Unless we have a more consistent narrative on our own sense, we're not going to succeed as we need to in this cyber world.

HAASS: We're actually doing some interesting work here at the Council on just this. What would be the rules that govern, if you will, this new space, literally and figuratively? Because you're right. Like all technologies, there's positive and negative aspects. There's offense. There's defense. And it really is probably one of the most unregulated frontiers out there. So we're all playing catch-up, not to be confused with ketchup.

Sir.

QUESTIONER: Anton Kuslonov (sp) with TIAA-Cref.

Coming back to the discussion on economic policy, we have a very interesting juxtaposition with discussions in the U.S. whether we should cut the deficit and sort of like going to economic austerity, while at the same time in the U.K. that's actually in the process of being implemented.

And so how do you gentlemen see that development taking place in the next couple of years? And what can we learn from each other?

RACHMAN: Well, I mean, it's quite early days in Britain. And we got a bit of a fright, because the last quarter GDP figures were really bad. The economy actually shrank. And so there is anxiety that maybe they are cutting too fast. I think Britain's cutting faster even than Greece, which is quite remarkable.

On the other hand, you know, we -- the argument the government makes, and maybe they're right, is that we can't afford to be as relaxed as the United States are, because we don't have a reserve currency. You know, we're that much more vulnerable to the markets. And yet the Labour Party, the opposition, actually do look to the U.S. and say, "Look, why are we pursuing this kind of crazy policy when the Americans are correctly continuing with something that looks more Keynesian?" although the tap's been turned off a bit.

So, yeah, you know, if you're a disinterested observer -- the Chinese, perhaps -- it will be a very interesting controlled experiment to see who gets it right.

HAASS: Two very different economic approaches, two very different political models.

Sure, Rick. I'm sorry, go ahead. Yes, sir.

QUESTIONER: Alfred Youngwood.

A simple question. Egypt -- any words of wisdom?

RACHMAN: Okay, you gave me Iran. You can have this one.

NYE: (Laughs.) I think that what Hillary Clinton said at the Munich security conference last weekend is right as a general attitude toward American policy. We would like to see an orderly transition to democracy. Now, it's a lot easier to say that as your slogan than it is to figure out how to do it.

I'm not a great expert on Egypt or the Middle East, but I think what it's going to require is some form of giving away -- or Mubarak might be able to transfer his power, as he's done in the past, when he was ill, to somebody, so that you don't trigger this clause which makes an election -- the speaker becomes the head of the government, and then you immediately have an election, which I think it's much too early for an election.

I think if you can get rid of the emergency law and get rid of some of the bad aspects of the constitution by having a constitutional convention or a body which changes it, and create a constitutional structure in which you then can try to build some parties, then you might have the chance to make progress toward an election at some point.

Notice, all these are big ifs, and it's a lot easier to say that this is a path than it is to actually carry it out and do it. But again, I mean, the current situation in Egypt could go either direction. There's a new middle, and that middle includes some good things and some bad things. And trying to figure out how we work with that middle, and at the same time work with the existing government, which we have to do, is very hard.

So Hillary's slogan, you know, "an orderly transition to democracy," is the right attitude. The details of implementing that are very hard.

HAASS: Let me ask a related question, though, which is, in this world of diffuse power, relative American decline but still significant capability to effective ends, to what extent is it -- should it be a necessity? Should it be a priority? Is it simply desirable? Is it none of the above that the promotion of democracy inform U.S. foreign policy? How should we think about that? Or should we mainly focus on how countries essentially act beyond their borders? How do we think about this question?

NYE: Well, we went through a period under the Bush administration where excessive zeal for the promotion of democracy contributed to what somebody once called a war of choice --

HAASS: A wise person.

NYE: -- rather than a war of necessity. And we paid a heavy price for it. And in a sense, it discredited the idea of democracy promotion.

If you think of democracy as something which is in our interest in the long run, but getting there often can lead to problems for us, I think trying to get that balance where you attract people to democracy rather than compel people to democracy is the right attitude.

So I think the way the administration has handled affairs in Egypt, like, for example, using both our hard power of aid and our soft power of close relations with the Egyptian military, to say, "Don't shoot these protesters," I think that's correct, and that's a proper use of power. But if we were to say, "Elections now," or, you know -- I mean, that would be the kind of mistake we made in Iraq.

So somewhere in between those two, there is a way of threading this needle.

HAASS: Yes, ma'am.

QUESTIONER: Catherine Lancaster (sp).

I'm wondering if -- does the U.S.'s ability to exercise soft power rely on people wanting to be like the U.S.? And, if so, does our current ability to -- our inability to get our house in order, with the tea party, with the economy, will that weaken our soft power going forward?

NYE: Well, I'd like to hear Gideon -- I'll answer that, but I think it'd be interesting to have a non-American answer to that as well.

RACHMAN: Well, also, I mean, I think foreigners have quite a nuanced view of America. They see a lot of America. And I think that, you know, it depends which America they're reacting to, so that, you know, if you look at European reactions to the U.S., there was a kind of euphoric reception to Obama because he was the anti-Bush. He was the America they liked, and Bush was the American that they don't like. And now the least popular American in Europe is Sarah Palin.

So there are aspects of the United States that Europeans and, I think, others as well find kind of a bit scary, kind of nationalistic, et cetera. And there are aspects of America that are still immensely attractive. It slightly depends which are accented.

On the question of the competence of the United States, yeah, I think that is part of the whole soft-power question. You know, I think that if America appears kind of deeply troubled, unable to get its own house in order, then some of those values that you talk about promoting, like democracy promotion, the promotion of free markets, you know, people say, "Well, hang on. Why are we listening to this?"

And again, there's a possibly apocryphal story where I think some Chinese official said, you know, "Just to think that Hank Paulson used to come here and give us lectures, you know, on how to order our affairs, and now look at them." So that is a danger.

NYE: Let me just add -- I mean, I agree with what Gideon just said. Let me add to that.

The United States suffered a blow to its soft power by the mess it made in 2008, particularly our preaching at others about how great we knew how to run a financial system. I mean, it was a real blow to Wall Street's soft power. But if that were all there were to American soft power, then I would really be worried.

Let me point out something else, which was a conversation that I had with probably the second most powerful person in the British government in the fall of 2008, after the collapse, but also after the election. He said, "You know, it's fascinating." He said, "Last year the conventional wisdom was you had to have a family fortune or a lot of money and you had to be part of a family dynasty or a big-name dynasty, and American democracy was corrupted and there wasn't -- you know, the system was terrible."

He said, "Then you went and you elected an African-American with a funny name who had no family money or big sources of money to begin with." He said, "All of a sudden you changed the way the world looked at America." He said, "That is where America's soft power comes from."

So, yeah, we're very messy. The closer up you look at us, at our political process, the messier it is. But if we can keep that larger, to quote Reagan, "shining city on a hill," then I think we're going to come through it okay.

RACHMAN: Could I just add a sentence on that? I mean, I think it's relevant to Egypt, these two views of America that are competing, and it (meant ?) often the same mind, so that if the Egyptian people in the street look at America, in some sense it's an inspiration, as the land of Facebook and so on, as the land where you do have free elections.

On the other hand, there's the America that's been propping up Mubarak for 30 years. Actually, they both exist. And which of those two narratives prevails, I think, is really important to how Egypt turns out.

HAASS: Alas -- and I want to apologize for those I didn't call on -- we've about run out our string.

I've got two housekeeping things to do. One is two upcoming meetings I want to let you all know. Tomorrow morning we've got a meeting here at breakfast with Ken Rogoff, who's published by far the most successful economics book in recent times, and Raghuram Rajan to talk about currency wars as part of our McKenzie (sp) series. And that runs from 7:45 to 9:00. Now, if you do want to go to that, you still have to go home tonight. (Laughter.)

And then, in about a week's time, on February 15th, on Tuesday evening, we're going to be marking the 20th anniversary of the Gulf War and Operation Desert Storm. And people such as Brent Scowcroft, Paul Wolfowitz and yours truly will gather in Washington, but New York members will have a chance to hear us essentially reminisce and reflect upon the lessons, what we got right and what we got wrong in that experience.

Again, what you've heard here tonight are two people who I think did one of the most important things in the business, which is they wrote big books. I don't mean big in the sense of telephone; I mean big in the sense of ideas. These are books that essentially grapple with the international system as it is evolving. And whether you agree or not is almost secondary. You learn a lot. These are rich -- these are rich efforts.

So I want to thank Joe Nye, the author of "The Future of Power," Gideon Rachman, the author of "Zero-Sum Future." Again, the books are out there. If you get them, you will stimulate the economy, or certainly their economies. And I want to --

NYE: Help the British economy.

RACHMAN: Exactly. We're in desperate straits.

HAASS: I want to thank them, and I also want to thank you for coming. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

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RICHARD N. HAASS: Good evening. We're starting uncharacteristically late because there was such a crowd that we had to accommodate the throngs.

Welcome, one and all, to the Council on Foreign Relations, and thank you for being here tonight. And I gather there's not just those of you here in the physical sense, but in Washington in the telephonic sense. And the subject, as everyone, I expect, knows, is navigating America's foreign policy in an uncertain world. This is not a meeting about the Navy; broader than that.

The timing could hardly be better, given the events in the Middle East, not just in Egypt and Tunisia but beyond, and then not just simply the events in the Middle East, whether it's continuing questions in Europe as to the Eurozone, ever bigger questions about China and its role, Afghanistan, Iraq, that set of issues; the whole panoply of global issues that's out there, and then the domestic issues here at home that, in many ways, raise challenges or questions about this country's ability to act in the world. And we'd be hard-pressed to come up with two better people to talk about it.

On my immediate left here is Joseph Nye, who's the university distinguished service professor at Harvard's Kennedy School of Government, the author of a lucky 13 books, most recently "The Future of Power." And Joe is simply, I believe, one of the wise men of American foreign policy, and he's a former good colleague when I was also at the Kennedy School. And he's a great friend, personally but also of this institution. He serves on our board.

Gideon Rachman is the chief foreign affairs correspondent of the salmon-colored newspaper -- and for those of you who get it electronically, you'll have to figure it out; if it's salmon-colored in that case, you're in trouble -- and the author of "Zero-Sum Future: American Power in an Age of Anxiety." And, shockingly enough, in the spirit of mercantilism, both books are for sale. (Laughter.) And no other books are for sale. This is a tightly controlled market here tonight.

This meeting is on the record, so anything said will be saved for posterity. We do have people, as I said, joining us over the airwaves. So if you do have your electronics on, please shut them off.

I'll spend a few minutes lobbing softballs at these two foreign-policy heavyweights, and then I will simply get them lazy and sloppy, and then you can really hammer them in the way that they want to be challenged.

Let's start out with a baseline. Here we are. It's early 2011. It's roughly 20 years since the end of the Cold War, roughly a decade -- this September will mark the 10th anniversary of 9/11.

What's going on in the world? I don't mean in Egypt or anywhere, but if one were, in a sense, painting with broad strokes -- Joe, why don't we start with you -- what are the principal broad strokes that help describe the world now that we're seeing?

JOSEPH S. NYE JR.: I argue in my book that there are two great power shifts going on in the 21st century. One is power transition from West to East. Sometimes it's called the rise of China. It's much more than that. It starts with Japan and includes Korea, China and others.

That is something we're familiar with. We've seen this before in history. We've got to manage it well so we don't get into a Thucydides trap or a World War I trap. I think we can manage it. But the other is much more interesting, which is not power transition from one state to another, but what I call power diffusion.

And that's the way in which technology has empowered all sorts of non-state, non-governmental actors to do things which previously were in the domain simply of states or large multinational corporations, if they had a big enough budget. And that means that while governments are the central actors on the stage, the stage is much more crowded.

And the best illustration of that, since you asked for 20 years, is 20 years ago the Worldwide Web had just been invented. I was at the Munich security conference over the weekend, and William Hague gave a speech, and he pointed out in the speech that in 1995, less than 20 years, there were only a few million people on the Worldwide Web. And today there are 1.7 billion. And if you asked how do we understand change in the 21st century, power diffusion seems to me even more than power transition.

HAASS: Gideon, would you disagree with any of that?

GIDEON RACHMAN: A bit of it. I mean, I agree with the first point that I think the major trend is this transition of power from West to East, and also, to some extent, from North to South with the rise of Latin America and so on. And I agree with Joe that I think it should be, in an ideal world, a manageable process.

I think I see rather more tensions coming out of it, though, than perhaps Joe does. I mean, in my book I talk about -- I see the financial crisis of 2008 as a kind of dividing line. And the period that you mentioned, from the fall of the Berlin Wall to 2008, is roughly 20 years.

And I call it an age of optimism for the reason that I think that it was a period when globalization created a set of common interests between the major powers of the world that allowed them all to be reasonably satisfied with the way the world was going, so that China and India were becoming much more prosperous. It was an age of optimism in the European Union with the creation of the Euro, doubling in size of the EU, and also an age of optimism here in the U.S. It was the tech revolution, the unipolar moment. You know all of that.

I think, with the financial crisis and the shift in economic fortunes, which, in a way, was going on before the crisis but has been kind of both crystallized and accelerated by the crisis, financial crisis, it's less clear that the global system is operating in ways that everybody's happy with, so that, for the West, I think there is now real anxiety about the rise of China.

And within that, as Joe says, that's part of a larger phenomenon, the rise of new powers. And I think that, on the other side of the Pacific, in China, you have got a shift, a new mood, a slightly more assertive mood, which we've seen in the last year in a number of foreign-policy clashes. And I think that, as a result, we're potentially entering a more conflictual age. So that's what I see as the major trend.

HAASS: Possibly. And one of the -- we've actually gotten about five minutes into this meeting, and I want to compliment both of you for not having mentioned the "D" word -- decline. But you have both mentioned the rise of China.

So one of the questions is not simply the absolute rise of China, but one of the phenomena of this world is also the relative -- and let me underscore the word relative -- decline of the United States and what you might call the OECD world -- Europe, Japan, whatever.

And your books have a very different perspective on this. You're essentially something of an anti-decliner in terms of either what's happening or what's likely to happen, and I think Gideon is more of a "This is reality, like it or not." Is that fair?

NYE: I think it's true that I am skeptical about the current conventional wisdom. I mean, Americans go through cycles of belief and decline. I mean, after Sputnik, the Russians were 10 feet tall. After Reagan's budget deficits, the Japanese were 10 feet tall. After 2008, which was a huge disruption, the Chinese are 10 feet tall. And a majority of Americans, actually, in one recent poll thought China was bigger than the U.S. now. It's simply not true.

If one looks ahead, not at psychology but at the reality, China has a lot of very real problems. And we have -- I mean, there are demographic problems. The labor force starts to turn downward after the growth in the labor force after 2015. They haven't solved the participation process. India was born democratic. China, as it gets to per capita income around $10 (thousand) to $12,000, is going to have to deal with a demand for participation. Notice I didn't say democracy.

HAASS: Right.

NYE: Demand for participation. They haven't quite figured out how to do that.

HAASS: Even if that's true, even if both China and India and some of these other places stumble a bit and their growth is halved -- let's just argue that -- there's still that relative decline of the United States.

NYE: Oh, if you think of decline and talk about relative rather than absolute, I think the phrase -- I think Fareed Zakaria first started it -- the rise of the rest is a reality. And if you think about the particular role of Asia, you know, in 1800 Asia was half the world's population and half the world's product. By 1900, it was half the world's population and 20 percent of the world's product. And it was essentially the Industrial Revolution.

And what we've been seeing basically since the last half of the 20th century, starting with Japan, and now with then Korea, now with China, and soon to be India, is Asia returning to normal proportions.

HAASS: But do you think the story -- I'm going to press you one more time. Do you think the story of what we're seeing and likely to see over the next few decades is more one of kind of Asia returning, if you will, to its normal position, or do you think that it also is something about the West and the United States and Europe -- and let's include Japan there, if you will -- not able to sustain the sort of trajectory it had; that the West has actually run into, largely for internal reasons, systemic challenges that place now a ceiling on its growth or capacities?

NYE: Well, I think the answer to that is no, to give you a quick answer. But it depends on what we do. There is no one future. We can do things that shoot ourselves in the foot. But by closing ourselves off with trade or immigration and so forth, we can do it.

Let me give you an anecdote from Lee Kuan Yew. I had lunch with him. And I cite this in the book. He said, "You know, the Chinese have 1.3 billion people to draw upon -- a huge pool of talent. The Americans have 7 billion people to draw upon. And what's more, when the Americans take these people, they recombine them in a way which creates diversity and creativity. And the Chinese will remain limited by ethnic Han nationalism." That's the source of my optimism.

Could we spoil that? Absolutely. There are some areas where we overreact to a terrorist incident, close off immigration, become protectionist, and shoot ourselves in the foot. I don't think we will, but we always could.

HAASS: Aren't we kind of doing that now? Well, we're doing that now.

NYE: We're trying, but we don't know how. (Laughter.) I mean, fortunately -- (laughs) -- fortunately, we're not very good at it. You know, go back to the Know-Nothing Party of the 19th century. You could have said the same thing.

HAASS: We no longer have a particularly active trade expansion policy, and we've reduced by more than half the number of visas for high-skilled immigrants.

NYE: Yeah. And I think that, as the economy recovers, I think we're going to recover some of that too.

RACHMAN: Well, to get back to the beginning of your conversation, I think the comparison that Joe makes with previous episodes of panic about decline is a very interesting one, the whole Soviet and Japanese threats. And I think it's worth -- it's a good way of trying to think about China. What is the comparison?

And I think that the Chinese challenge is more real, because if you think about the Soviet challenge, we now know, in retrospect, that, of course, the Soviet economy was a basket case. We didn't know that at the time because they weren't trying to compete on world markets. We know, however, that China is capable of growing at 9 to 10 percent a year, becoming the world's largest manufacturer, et cetera. So it clearly hasn't got that economic flaw, that massive inability to compete.

Similarly, Japan is number one; the famous book by Ezra Vogel. In retrospect, of course, that doesn't seem to me to ever have been plausible for simple population reasons. They would have to have been twice as rich as the average American to have a larger economy than China -- than the U.S.

China -- the sheer scale of the country, the fact that it's four times as many people, means that I think it's pretty inevitable that at some point the Chinese economy will be larger than that of the U.S. Indeed, the latest projection in The Economist was 2019, really not very --

HAASS: Can I interrupt you for one second?

RACHMAN: Yeah.

HAASS: Does that really matter in terms of world power, given the denominator of population, given that everything that goes on in China is divided by 1.3 billion? The fact that it may have an economy in 25 years that's the same size as the United States, is it that significant when our population is going to be one fourth the size?

RACHMAN: Yeah, I think it is. I mean, I think that there's no absolute kind of read across; that, you know, you have "x" size of economy equals "x" amount of power. Obviously it's more complicated than that. But I think you can already see the way in which Chinese economic power now is changing the world.

So, to give you a modest anecdote, you know, there's a sovereign debt crisis in Europe. The Chinese are going around quite visibly, and in the company of photographers, saying, "We'll buy Portuguese bonds. We'll buy Greek bonds." And, you know you think back to the Marshall Plan. You know, a long time ago it was the Americans who had the money.

And the Chinese, I think, are making a point. And they're not doing this out of -- for charitable reasons. There is an element of influence-buying and demonstration of power. And I think, in a broader sense, I think one of the really interesting things that's happening in Asia now is that its strategic and economic interests of a lot of the countries in the region point in different directions, so that for Japan, for Korea, for Australia, their major trading partner now is China. Their security relationship is with the United States.

And I think there's a tension there. And my guess is that unless the Chinese massively overplay their hand and scare their neighbors even more than they're doing now, in the end those economic ties will help to create bit of a -- (inaudible).

NYE: Could I agree and disagree with Gideon? I agree in the sense that size of economy gives you economic power, and that's important. But per capita income is a much better measure of the sophistication of an economy. And while the Chinese will equal us somewhere in the 2020s on size, on per capita income it's not going to be till 2040, 2050.

RACHMAN: Oh, I agree with that, but I think that if you look at the disposition of power -- the use of power in the world -- I mean, Luxembourg already has a higher GDP per capita than the United States, but there are not very many of them, so they're not going to be very powerful.

NYE: But the other point that I would make is that if you look at power, which was Richard's question, GDP is one measure. And per capita GDP is a refinement of that. But you also -- I mean, what I do in my book is look at military power, economic power and soft power.

On military power, the Chinese aren't going to equal the U.S. for a couple of decades or more. And on soft power, the Chinese can't equal the U.S. until they change their domestic political system. Hu Jintao told the 17th Party Congress, "We need to invest in soft power." That's very smart for a country whose hard power is rising and scaring its neighbors. You want to make yourself attractive through soft power. But they're having a very hard time doing it. Every time they have a Beijing Olympics or a Shanghai exposition, every time they lock up a Liu Xiaobo, they shoot themselves in the foot.

And so if you take the dimensions of power, all of them, I just don't see the Chinese equaling the U.S.

RACHMAN: Well, I mean, actually, boringly, can I agree with you? I mean, I think that, you know, when we talk about the rise of China, I'm not talking about China displacing the U.S. as the most powerful country in the world even when its economy is larger than that of the United States, because there are all these other metrics that you mentioned. But what I do think is that you will see a constraint on American power, growing constraint on American power. So the unipolar moment is over. And I think that the U.S. increasingly will find it difficult to get its way.

Let me give you just a couple of concrete examples. The climate-change talks were a very interesting thing, where America turns up, kind of assumes that the world's democracies will be on its side, and, in fact, you know, when it comes down to it, India, Brazil, they're with China. And those kinds of incidents, I think, will multiply.

NYE: Well, I think we would agree that the unipolar moment is over. I never thought it existed in the first place.

RACHMAN: Right.

NYE: I thought that was a Krauthammer myth, which led us into very deep trouble in Iraq, because people believed it. It's just as great a mistake to believe in American ascension as in American decline. But I do think that the point that is worth remembering is that Asia is not one thing. We're seeing the rise of Asia.

But if you look at Japan, you look at India, you look at Vietnam, these countries want the U.S. That has a huge effect on the balance of power. It's as though Canada and Mexico wanted a Chinese military alliance because of their fear of the U.S. We don't threaten our neighbors because we have soft power along with our hard power. China frightens its neighbors because it isn't able to generate that soft power to go with its hard power.

RACHMAN: I mean, I think that's right, but I think that for the reason I mentioned this divergence between economic and strategic interests, the debate is open and ongoing among the neighbors of China and the allies of the U.S. as to where they look. And I think you could even see it in the past year and a half in Japan, where you have Prime Minister Hatoyama coming in, tilting quote noticeably towards China, then replaced by another prime minister who tilts back to the United States.

And I think you will see more and more of these oscillations, because it's a slightly -- it's a difficult and uncertain position. And since you quoted one Singaporean, I'll quote a more junior one, Kisho Mavobani (ph), who, of course, represents a particular Asian's point of view, but, you know, worth listening to.

And he said to me, "Well, the thing is that we know that we do want America to stay in the region in some ways, but we know that China will still be here in a thousand years' time. We don't know America will still be here in a hundred years' time." And I think that question of can America sustain its presence in the Pacific, because of the kind of financial pressures that Richard and others have written about, is a real live question.

HAASS: Can I just break in here for a second?

NYE: Oh, sorry about that. (Laughs.)

HAASS: This is why -- this is why unemployment is so high, because presiders are now unemployed.

Let's just raise one other part of the world, because so much of this has been about Asia. But so much of the news -- and in some ways, if Asia is the most successful theater of the world, at least the most dynamic, the Middle East is the least successful, and in many ways the least dynamic.

What does that tell us, then, about the future, about diffusion of power, about American -- because China is not a significant presence in the Middle East. On the other hand, what we're seeing in many cases are the limits to American power. Is that not something of a glimpse into the future, where a world of diffused power is much more than a pretty unattractive sight, where you've got some fairly aggressive medium-size states?

You've got all sorts of non-state actors, whether it's the Hezbollahs or al Qaedas that are incredibly dangerous, running amok. Our ability to persuade countries to reform tends to be rebuffed. Our ability to persuade countries to compromise at the negotiating table tends to be rebuffed.

Is this not another vision, if you will, of the future?

NYE: Oh, absolutely. I mean, if -- I mean, this is the point why I stressed diffusion of power rather than transition of power among states as the key question.

If you think of the information revolution, it's quite remarkable. The price of computing power went down a thousand-fold in the last quarter of the 20th century. If the price of an automobile had gone down as rapidly, you could buy a car today for five dollars.

What that means is all sorts of individuals and organizations, non-state organizations, are suddenly empowered. They can do things that previously reserved the governments with big corporations. And that's what we're seeing in the Middle East today. The information revolution has provided more information to more people than any time in history.

And what that's done in the Middle East is good and bad. If, on the optimistic side, the old view we had, which you either had the autocrats or the Islamist extremists -- no, there's a middle. And this profusion of information has created a middle. And what's more, it's provided technology and gadgets so that they now can coordinate, whether it's Twitter or Facebook and so forth, to actually do things.

But that middle is a very diverse group. And how we play this could turn out very bad or very good. So it's not necessarily pure pessimism, but it's not pure optimism either. And it's going to be very difficult for a government -- as we see, as we watch the Obama administration trying to walk this tightrope, you have to deal with the governments and hard power, because they're in power, but you also have to realize it's not just whose army wins; it's whose story wins. You have to have a narrative that reaches civil society at the same time. And walking that tightrope is hard, and we've seen some wobbling.

RACHMAN: Yeah. No, and I think it's a very plastic moment. It could turn out -- it could be the best thing that ever happened to the Middle East if, you know, you do actually get a transition away from these old autocracies. But of course, you know, things could go massively wrong as well. That's obvious.

I think, actually, although, in a way, this has been a demonstration of this kind of new cyber world, I think there's a slight danger of exaggerating it. You know, some of the talk is as if there was never a revolution before Facebook. How did the French storm the Bastille without Twitter? It's incredible. (Laughter.)

HAASS: Le Twitter. (Laughter.)

RACHMAN: But -- so, you know, while it's very interesting the way it's shaping events, you know, revolutions have occurred before. And I think, to make another sort of old-fashioned point, I think it's also a reminder of the importance of states still, because what's the question that's preoccupying us? How is this going to turn out? The question is, who ends up in control of the state? And that's what's making people's hearts flutter in the White House or whatever? That's how we'll, in a way, define how the revolution turned out.

HAASS: If you're talking about this world in the Middle East we just described, it's pretty rough around the edges; more broadly, a world of diffuse power. Are you optimistic about the states and others essentially coming to some sort of understanding or consensus about how to govern it? Do you see -- in general, if you were looking at the trends towards order versus disorder, in terms of what you might call the management of the globe, do you -- I mean, you had the failure at Copenhagen. You've got world trade talks essentially on life support, if that. You've got, at best, half-hearted efforts to deal with North Korea and Iran's nuclear programs. And one could go around some other issues as well.

Do you see grounds for optimism that, as this power builds and spreads -- while this information and other technologies get diffused, what gives you a sense that the world would be better for all this?

NYE: Well, I think it's not automatically going to be better. There are lots of things that can go wrong. But I think it'd be a mistake to assume that it's totally unmanageable. There's a lot more governance -- not government -- governance in the world than we realize. Even the failure at Copenhagen was followed by modest rapprochement at Cancun.

And there is a question of -- I mean, the nonproliferation treaty, we have major challenges from North Korea and Iran. But let's face it. Jack Kennedy said there were going to be 25 nuclear-weapon states by 1975, and, in fact, there are nine.

So, you know, it's glass half-full, half-empty. But I think it's a mistake to say, "Oh, because its power is diffusing, we're all going to hell in a hand basket." A lot will depend on America and American power. This is why the declinist view that we're all finished is so dangerous, because it makes us feel draw inward; don't do anything. If the largest country doesn't take the lead in providing these public goods to deal with these kind of challenges, nobody else will.

HAASS: Right.

NYE: And that's why being accurate about the assessment of American power, neither Pollyannish nor too pessimistic, is essential to deal with the kinds of problems you're talking about.

HAASS: Some would argue -- Mike Mullen was here the other day, the chairman of the Joint Chiefs of Staff, and he has been on the record as saying that the greatest threat to American power is the economic foundations and essentially the debt.

And you've been -- you know, you're at the Kennedy School of Government and you're a keen observer of the American political process. Do you have optimism that this country will, if you will, deal with the debt before the bond market deals with us?

NYE: I -- nobody -- if I knew the answer to that, I'd be very wealthy.

HAASS: But it's still -- none of us knows the answer. The question is --

RACHMAN: The question of the bond market --

NYE: Yeah, but I think not before the 2012 election. But it's interesting, if you look at a longer perspective on American politics, the tea party movement really is at 20 percent which is dedicated to solving the deficit problem. And if you look at the Simpson-Bowles commission, they proposed some very sensible things that can be done.

I think the problem is, how do you put that package together? And probably you're not going to put it together until after the 2012 election. But, you know, in principle, one can see a solution. Will it happen or not? I mean, nobody knows. But I would think that it's in the president's interest to grab this issue and make it his issue in 2012.

HAASS: You're an observer of -- you're not an American, but you're an observer. Sometimes observers see us better than we see ourselves. De Tocqueville and some others had some views about that; Mr. Bryce.

RACHMAN: I'm happy to play de Tocqueville with you. (Laughter.)

HAASS: So looking at us, do you share Professor Nye's optimism that essentially, two years down the road, we're more likely or at least fairly likely to get our domestic house in order?

RACHMAN: Well, look, I'm sort of -- if I think about modern-day politics, it makes me kind of pessimistic. If I think about the kind of sweep of history, I'm more optimistic. And what I mean by that is you look at the mess in Washington, the polarization of the debate, it does look pretty hopeless. I can't see them reaching some sort of agreement to reduce the deficit.

It may be that America, you know, has more time before the bond markets reap revenge on it. I mean, if you look, the Japanese seem to have managed to get to some incredible level of debt-to-GDP ratio. They're still going. So -- but what I mean about being optimistic about the great sweep of history is that although, you know, my book has plenty of gloom in it, I did, at the end, try to draw back and remember that, you know, there have been other big crises of liberal economies and liberal politics, most notably the 1930s, you know, when things were much, much worse economically, when the threats overseas were much worse. And many people did say, you know, actually, liberal democracy doesn't work, I mean, even in our own societies, and moved off to the extremes. And actually, in the end, they were wrong.

So, you know, one has to kind of keep the faith, even if you can't quite see your way through within the next three to five years.

HAASS: Well, on these positive notes, let me open it up. If you'd raise your hand, wait for a microphone, and then identify yourself. And please keep your questions to a single one and be succinct. We would be forever grateful.

Yes, sir.

QUESTIONER: Hi. My name is Khalid Azim.

Is there such a thing as moral power? And, if so, does the U.S. have it?

NYE: Well, my view is clearly yes, that -- in both senses, that there is moral power. That's what I mean when I talk about soft power. Power is the ability to get others to do what you want. You can do it through coercion -- sticks -- payments -- carrots -- or traction and persuasion. And having a moral position moves people. It attracts them. It persuades them. When we live up to our ideals, which we don't always, we do indeed have that moral power. And that's what soft power is about.

RACHMAN: Can I just quickly answer that? I mean, I think that -- I think -- I agree that America does have enormous moral power. I think there's -- one thing we might underestimate, though, is the extent to which the Chinese have some of that as well.

I mean, I think one of the interesting things at Copenhagen was the way they were able to position themselves as the spokespeople of the developing world, to say, "Look, you guys consume this enormous amount of energy and you're now saying to us we can't aspire to the same sorts of lifestyles as you. Who are you to say that?" And that had a big resonance.

HAASS: All the way in the back. Is that Mr. Rubin?

QUESTIONER: Yes.

Thank you, Richard.

I guess this is more for Gideon than Joe, but if you could both address it. Why, in drawing a straight line of Chinese growth in the economic side, you don't take into account the many people who believe that China's ability to stay stable politically takes a big chunk out of that straight line and raises very serious questions when you throw out where China will be in 20 years economically?

Using a statistic about economics, there's a whole bunch of other factors, including the huge labor unrest and the battles against the center and all of those things. So could you address the stability of China and how that would factor into this straight line of economic growth? Thank you.

RACHMAN: That's obviously an incredibly important point. And you're right; straight-line projections are usually wrong. And China has enormous problems in environmental, political transitions to go through.

However, you know, I don't think that even if one factors in a great deal of instability in China, that will be enough to kind of -- I mean, we, in 10 years' time, 15 years' time, say, "What were we thinking about when we thought China would be a great power?" They may be a very troubled power, and their growth may slow down. But simply given the size of the country and the momentum of economic growth over the last 30 years, I think they will be bigger players in the future.

Just to give you an analogy, I mean, if you look at the rise of Germany in the 1870s -- I don't mean that this means war, but in an economic sense, you know, this is a country that goes through enormous turmoil. They go through the defeat in the First World War, hyperinflation, Great Depression, Second World War. By the 1950s, they're actually still one of the most developed economies in the world.

So you can have enormous instability. But if you've got a country that's somehow got the hang of economic growth, is quite large, is quite productive, it doesn't mean that the whole thing gets derailed at some point.

HAASS: All the way in the back. Yes, sir.

QUESTIONER: Professor Nye --

HAASS: You have to introduce yourself.

QUESTIONER: Chung Weihua (ph).

Professor Nye, I'm wondering if you graded Obama demonstration in how it uses power, according to what you said in the book. What score you would give in its dealing with Egypt in the past two weeks and in dealing with China in the past year?

NYE: Well, I think when Obama came into power, he had to restore the loss of American soft power that had occurred in the Bush years. This is not a political judgment. It's simply reporting what polls say. And Hillary Clinton talked about smart power, which is the ability to do both hard and soft power.

Obama gave a series of speeches in Turkey, Cairo, to the U.N. and elsewhere, and tried to restore that soft power. And the polls show that some of that worked. But when you look at the longer term, you have to ask, do the actions reinforce the words? And some of these, it's too soon to know.

I think, frankly, when the Obama administration came into office in relation to China, they were a little bit too naive, too optimistic. The Chinese, in fact, thought the Americans were in decline. So as Obama tried to compromise with China, they basically thought, "Ah, it proves our point. The Americans are in decline." I think the net effect of that was bad for China. Its hubris led it to spoil its relations with Japan, Vietnam and India, and also with the United States. I hope that's now rectified after the Hu Jintao visit and that China is back to the old Deng Xiaoping advice of keep a low profile.

On Egypt, I think they're wrestling with this dilemma I described earlier, which is how do you use this soft power that was expressed in the Cairo speech while also realizing that when you're talking about balancing Iranian power or preserving the peace process and not seeing a war with Israel, you've got to deal with the government.

And that is a very difficult tightrope to walk on so that you're dealing with government, which is essential for the hard power, but also creating a narrative so you don't alienate civil society, which is the source of stability and attraction for the long run. And I think they've wobbled a bit on that tightrope, but, in my opinion, they haven't yet fallen off.

HAASS: Sir.

QUESTIONER: Stephen Black (sp).

The United States exercises enormous power -- you might call it dumb power, perhaps -- by being the largest debtor, having the largest and richest markets, being the largest consumer. If the United States -- as the fat boy in the boat, if the United States doesn't take the most active leadership in global governance, is there a formula to maintain or to create stable global governance without the U.S. taking the leadership role?

RACHMAN: Well, I mean, I think, you know, we referred to this before, that obviously the U.S. is the most plausible leader. I mean, I think one of the reasons that the G-20 is now a slightly troubled organization is because America is the only obvious leader, but it's not quite powerful enough.

And so, you know, at the time of the financial crisis, everybody said -- the analogy people looked for was the new Bretton Woods. They said, "We need a new Bretton Woods." And yet if you look back at the situation when Bretton Woods happened, the U.S. was incomparably the most powerful country in the world. Essentially -- I mean, if you read the Skidelsky book on Keynes, the Americans basically designed the institutions and then were able to impose them on everyone, including the British, who, although they didn't much like it, weren't in a position to fight back.

And I think that in this current situation, America is the most powerful country in the world, but it's not able to push everybody in the way that it was, say, at the time of Bretton Woods. So you tend to get deadlock, you know, on a number of issues -- climate change, global economic imbalances.

The most they'll do is they'll agree they need to agree, but they can't get there, because the national interests come into play, so that although there's a recognition that there's a common problem that can only be solved internationally -- and that is a good starting point on a range of issues -- when they actually get down to discussing the nuts and bolts -- as I say, climate change, global economic imbalances, nuclear proliferation -- people's interests come to the fore and then they get deadlock and you don't get an agreement.

NYE: Let me just agree with what Gideon just said, but also warn us all against what I call the golden glow of the past. In 1945 to '50, Americans had a nuclear monopoly and nearly half of world product, and yet we still weren't able to prevent the so-called loss of China or to win the Korean War. So this idea that once we were this hegemon that could do whatever we wanted, and today we're down in this poor --

HAASS: That was the first unipolar --

NYE: Yeah, this is the golden glow of history.

HAASS: Sure, all the way in the back.

QUESTIONER: Thank you very much. Mahesh Kotecha.

You know, my question is, what is the great benefit of being the hegemon? And what's wrong with having multipolar world? We believe in the U.S. in checks and balances. Why not worldwide?

NYE: Well, in my book, I argue that power isn't good or bad per se. It's like calories in your diet. Too much is bad for you. Not enough is bad for you. And so the idea -- I don't think the United States should try to be a hegemon. I think it's a terribly imprecise and rather useless and confusing word.

But I do think that if the largest country doesn't help to take the lead in organizing others to produce public goods, it's very hard to see smaller countries doing it. So why should we concern ourselves about American power? Not to be able to say, "I'm number one." It's not a Super Bowl. It's a question of can you produce the kind of order, faced with the diffusion of power that Richard talked about. And without the United States working on that, I don't see other countries being able to do it.

HAASS: Why is that? Why is it other countries can't do it or won't do it? Why is it that the United States is one of the rare countries that thinks in those kind of global -- what you academics would call global public goods and things like that? And the Chinas and the Indias and even Europes at times don't think in those terms. What's it about this country?

NYE: Well, it's not about this country. Actually, the theory of collective action or public good, as Mancur Olson points out, that when you have a large number, it's a lot easier to free ride rather than bear the burden. The reason the largest bears the burden is because they're going to see the benefits of the burden. For the small, their actions are so insignificant that it's easier to free ride.

China is now getting to a position analogous to where the United States was back in the 1920s and '30s. After Britain no longer was providing these goods, Americans were free riders. It's not our culture. We used to love to free ride. And it produced the '30s and World War II.

So what we've got to do now is get the Chinese and others to start pulling their share.

RACHMAN: I mean, I think that it's interesting. There's divergence of opinion in Europe, I think, between elites and the public as to whether we actually want to be a major power. So you go to Brussels and they say, "Well, we must mobilize our power and we must -- you know, it's terrible that Europe's not more of a player in the world."

But actually, one of the reasons Europe's not more of a player in the world is that there is no constituency for, say, increased military spending. Europe wants to just kind of put the blanket over its head. And it was sort of summed up for me where actually I saw a French civil servant. There was a discussion of the kind of rising tensions in the Pacific. And the French civil servant asked the Chinese diplomat there, "What is Europe's role in there? Are we irrelevant?" And then he said, "I hope the answer is yes," because he didn't -- you know, "It suits us to let the Americans kind of look after it."

HAASS: Lots of hands. Sure.

QUESTIONER: Thank you.

We've spoken a lot about --

HAASS: Introduce yourself so we all know who you are.

QUESTIONER: Sorry. Matt Hooper (sp).

We've spoken a lot about the rise of the East, but I'm also curious about power diffusion, which Professor Nye mentioned earlier. What are your short-term thoughts -- next two years, three years -- when governments can still so quickly control things like the Internet, not necessarily our long-term implications, but how are these next few years going to be affected by this government-Worldwide Web relationship?

NYE: Well, I have a chapter in my book on cyber power. And what it points out, that it's a mistake to be a cyber optimist or libertarian, the view that it's transforming the world. Governments are still able to control the Internet, but it gets leakier and leakier. Egypt shut off the Internet at considerable expense. I mean, if you want to run a banking system or a trade system, you pay a high price when you do that.

But there are a lot of sources of information. Land lines weren't cut off, and you could also pick up a cell phone and use this device "Speak to Tweet," so you called a number in Europe or elsewhere and you were able then to get a Twitter account and a tweet on the Internet.

So the point is that there are ways to work around this. Governments still have sovereign power over the parts of the Internet that are within their borders, and it's silly to think that that is gone. But it's getting leakier and leakier. Even the great fire wall of China is getting leakier.

HAASS: Sure.

QUESTIONER: Nick Branford (sp), Lazard.

How do you think the West should handle Iran?

NYE: Your turn. (Laughter.)

RACHMAN: Thank you.

HAASS: Deftly, I think, is the word.

RACHMAN: Well, you know, I'm not privy to the intelligence. There's this endless debate, you know, about how close are they to the bomb. I mean, I think I've been hearing for the last 10 years they're one or two years away and that now there are people actually saying they've been very seriously disrupted by Stuxnet and so on. So a lot depends on that question, which, you know, I don't have the answer to.

I mean, if you think that they're a few years away perhaps because of the cyber disruption, then the only sensible thing to do is to play for time. We now know, because of the aborted green revolution, this is an unstable country, a country that could change, or the regime is unstable. You know, clearly we don't want a military conflict with them if it can be avoided at all.

So I think you just monitor them and cross your fingers that the country changes.

HAASS: I'm not only calling on men, but so far, at least, not one woman has raised her hand since this meeting began. So I know I'm going to get criticized afterwards for my selection bias, but I want to point out that it's not a selection bias. It's a --

NYE: There we go.

HAASS: (Laughs.)

QUESTIONER: Min Tufain (sp) with the U.N. Foundation.

You mentioned earlier, Mr. Nye, about -- Professor Nye -- that maybe it's not part of the U.S. culture to take the lead in the world and that we have been a free rider in the past. Well, what about American exceptionalism? Is that something that we need to -- do we need to have that sense for us to lead in the world?

NYE: American exceptionalism is interesting. In one sense, President Obama is right that every country thinks it's exceptional. But it's also true that American exceptionalism really goes back to our founding. I mean, you know, the city on the hill, which Reagan transformed into shining city on the hill, was John Winthrop.

I mean, this is 17th century. We believe that we've broken away from that bad old world back there in Europe. Remember, these were British colonists who believed that, because of -- let me call them strange religious beliefs, but whatever. I happen to come from a Puritan background. My family got here in 1639, so I can criticize these people. (Laughter.)

But they had very odd, in the Church of England sense, religious beliefs. And we were exceptionalists in that sense. And that has its bad side. It makes us think we're holier than thou or better than others. It also has its good side. It means that we think we have to stand for human rights and liberty, that there is something about us that, even though we don't always live up to it, we have to keep it. And that's the source of our soft power.

Think back to the Vietnam period, when people were demonstrating in the streets around the world against America, and people thought America was absolutely terrible. What were the demonstrators singing? Not the Internationale of the communists -- Martin Luther King's "We Shall Overcome." That's real soft power. And that grows out of American exceptionalism.

HAASS: Sure.

QUESTIONER: Hi. Lane Greene from The Economist. Hi, Gideon.

HAASS: I think The Economist should ask the Financial Times a question. (Laughter.)

QUESTIONER: I apologize --

RACHMAN: (Inaudible) -- The Economist.

NYE: Let's get ugly here.

QUESTIONER: A long-time correspondent of The Economist, but my question is for Professor Nye. Catch you later, Gideon. (Laughter.)

My question is about -- we've talked about soft power a lot. And the word public good, the phrase public good, has come up quite a bit. And the Internet has been talked about quite a bit as well. We've given -- we've diffused more power, the United States has, by the creation of the Internet and the Worldwide Web, and even now Facebook and Twitter.

Do foreigners think about these as American products when they get on them, whether to communicate with one another not about America, or when they get on these products to take up cyber arms against America? Why doesn't our gift of this diffusion of power to the world redound to our credit more than it actually does?

NYE: Well, I should be very nice in answering The Economist's question, since you called my book "rigorous and convincing." (Laughter.)

HAASS: We'll see if your answer is now.

NYE: I think the danger is thinking that somehow cyber is all good. It's good and it's bad. I mean, it can be used for malevolence against us. It can also be used for Internet freedom, which I think, in the long run, helps us.

One problem for American policy is we haven't quite figured out how to deal with this. Hillary Clinton gave a wonderful speech last January after the problem between China and Google about how we stood for Internet freedom. And then along comes Wikileaks and we want to censor. You know, we haven't figured out how we fit all this together. Unless we have a more consistent narrative on our own sense, we're not going to succeed as we need to in this cyber world.

HAASS: We're actually doing some interesting work here at the Council on just this. What would be the rules that govern, if you will, this new space, literally and figuratively? Because you're right. Like all technologies, there's positive and negative aspects. There's offense. There's defense. And it really is probably one of the most unregulated frontiers out there. So we're all playing catch-up, not to be confused with ketchup.

Sir.

QUESTIONER: Anton Kuslonov (sp) with TIAA-Cref.

Coming back to the discussion on economic policy, we have a very interesting juxtaposition with discussions in the U.S. whether we should cut the deficit and sort of like going to economic austerity, while at the same time in the U.K. that's actually in the process of being implemented.

And so how do you gentlemen see that development taking place in the next couple of years? And what can we learn from each other?

RACHMAN: Well, I mean, it's quite early days in Britain. And we got a bit of a fright, because the last quarter GDP figures were really bad. The economy actually shrank. And so there is anxiety that maybe they are cutting too fast. I think Britain's cutting faster even than Greece, which is quite remarkable.

On the other hand, you know, we -- the argument the government makes, and maybe they're right, is that we can't afford to be as relaxed as the United States are, because we don't have a reserve currency. You know, we're that much more vulnerable to the markets. And yet the Labour Party, the opposition, actually do look to the U.S. and say, "Look, why are we pursuing this kind of crazy policy when the Americans are correctly continuing with something that looks more Keynesian?" although the tap's been turned off a bit.

So, yeah, you know, if you're a disinterested observer -- the Chinese, perhaps -- it will be a very interesting controlled experiment to see who gets it right.

HAASS: Two very different economic approaches, two very different political models.

Sure, Rick. I'm sorry, go ahead. Yes, sir.

QUESTIONER: Alfred Youngwood.

A simple question. Egypt -- any words of wisdom?

RACHMAN: Okay, you gave me Iran. You can have this one.

NYE: (Laughs.) I think that what Hillary Clinton said at the Munich security conference last weekend is right as a general attitude toward American policy. We would like to see an orderly transition to democracy. Now, it's a lot easier to say that as your slogan than it is to figure out how to do it.

I'm not a great expert on Egypt or the Middle East, but I think what it's going to require is some form of giving away -- or Mubarak might be able to transfer his power, as he's done in the past, when he was ill, to somebody, so that you don't trigger this clause which makes an election -- the speaker becomes the head of the government, and then you immediately have an election, which I think it's much too early for an election.

I think if you can get rid of the emergency law and get rid of some of the bad aspects of the constitution by having a constitutional convention or a body which changes it, and create a constitutional structure in which you then can try to build some parties, then you might have the chance to make progress toward an election at some point.

Notice, all these are big ifs, and it's a lot easier to say that this is a path than it is to actually carry it out and do it. But again, I mean, the current situation in Egypt could go either direction. There's a new middle, and that middle includes some good things and some bad things. And trying to figure out how we work with that middle, and at the same time work with the existing government, which we have to do, is very hard.

So Hillary's slogan, you know, "an orderly transition to democracy," is the right attitude. The details of implementing that are very hard.

HAASS: Let me ask a related question, though, which is, in this world of diffuse power, relative American decline but still significant capability to effective ends, to what extent is it -- should it be a necessity? Should it be a priority? Is it simply desirable? Is it none of the above that the promotion of democracy inform U.S. foreign policy? How should we think about that? Or should we mainly focus on how countries essentially act beyond their borders? How do we think about this question?

NYE: Well, we went through a period under the Bush administration where excessive zeal for the promotion of democracy contributed to what somebody once called a war of choice --

HAASS: A wise person.

NYE: -- rather than a war of necessity. And we paid a heavy price for it. And in a sense, it discredited the idea of democracy promotion.

If you think of democracy as something which is in our interest in the long run, but getting there often can lead to problems for us, I think trying to get that balance where you attract people to democracy rather than compel people to democracy is the right attitude.

So I think the way the administration has handled affairs in Egypt, like, for example, using both our hard power of aid and our soft power of close relations with the Egyptian military, to say, "Don't shoot these protesters," I think that's correct, and that's a proper use of power. But if we were to say, "Elections now," or, you know -- I mean, that would be the kind of mistake we made in Iraq.

So somewhere in between those two, there is a way of threading this needle.

HAASS: Yes, ma'am.

QUESTIONER: Catherine Lancaster (sp).

I'm wondering if -- does the U.S.'s ability to exercise soft power rely on people wanting to be like the U.S.? And, if so, does our current ability to -- our inability to get our house in order, with the tea party, with the economy, will that weaken our soft power going forward?

NYE: Well, I'd like to hear Gideon -- I'll answer that, but I think it'd be interesting to have a non-American answer to that as well.

RACHMAN: Well, also, I mean, I think foreigners have quite a nuanced view of America. They see a lot of America. And I think that, you know, it depends which America they're reacting to, so that, you know, if you look at European reactions to the U.S., there was a kind of euphoric reception to Obama because he was the anti-Bush. He was the America they liked, and Bush was the American that they don't like. And now the least popular American in Europe is Sarah Palin.

So there are aspects of the United States that Europeans and, I think, others as well find kind of a bit scary, kind of nationalistic, et cetera. And there are aspects of America that are still immensely attractive. It slightly depends which are accented.

On the question of the competence of the United States, yeah, I think that is part of the whole soft-power question. You know, I think that if America appears kind of deeply troubled, unable to get its own house in order, then some of those values that you talk about promoting, like democracy promotion, the promotion of free markets, you know, people say, "Well, hang on. Why are we listening to this?"

And again, there's a possibly apocryphal story where I think some Chinese official said, you know, "Just to think that Hank Paulson used to come here and give us lectures, you know, on how to order our affairs, and now look at them." So that is a danger.

NYE: Let me just add -- I mean, I agree with what Gideon just said. Let me add to that.

The United States suffered a blow to its soft power by the mess it made in 2008, particularly our preaching at others about how great we knew how to run a financial system. I mean, it was a real blow to Wall Street's soft power. But if that were all there were to American soft power, then I would really be worried.

Let me point out something else, which was a conversation that I had with probably the second most powerful person in the British government in the fall of 2008, after the collapse, but also after the election. He said, "You know, it's fascinating." He said, "Last year the conventional wisdom was you had to have a family fortune or a lot of money and you had to be part of a family dynasty or a big-name dynasty, and American democracy was corrupted and there wasn't -- you know, the system was terrible."

He said, "Then you went and you elected an African-American with a funny name who had no family money or big sources of money to begin with." He said, "All of a sudden you changed the way the world looked at America." He said, "That is where America's soft power comes from."

So, yeah, we're very messy. The closer up you look at us, at our political process, the messier it is. But if we can keep that larger, to quote Reagan, "shining city on a hill," then I think we're going to come through it okay.

RACHMAN: Could I just add a sentence on that? I mean, I think it's relevant to Egypt, these two views of America that are competing, and it (meant ?) often the same mind, so that if the Egyptian people in the street look at America, in some sense it's an inspiration, as the land of Facebook and so on, as the land where you do have free elections.

On the other hand, there's the America that's been propping up Mubarak for 30 years. Actually, they both exist. And which of those two narratives prevails, I think, is really important to how Egypt turns out.

HAASS: Alas -- and I want to apologize for those I didn't call on -- we've about run out our string.

I've got two housekeeping things to do. One is two upcoming meetings I want to let you all know. Tomorrow morning we've got a meeting here at breakfast with Ken Rogoff, who's published by far the most successful economics book in recent times, and Raghuram Rajan to talk about currency wars as part of our McKenzie (sp) series. And that runs from 7:45 to 9:00. Now, if you do want to go to that, you still have to go home tonight. (Laughter.)

And then, in about a week's time, on February 15th, on Tuesday evening, we're going to be marking the 20th anniversary of the Gulf War and Operation Desert Storm. And people such as Brent Scowcroft, Paul Wolfowitz and yours truly will gather in Washington, but New York members will have a chance to hear us essentially reminisce and reflect upon the lessons, what we got right and what we got wrong in that experience.

Again, what you've heard here tonight are two people who I think did one of the most important things in the business, which is they wrote big books. I don't mean big in the sense of telephone; I mean big in the sense of ideas. These are books that essentially grapple with the international system as it is evolving. And whether you agree or not is almost secondary. You learn a lot. These are rich -- these are rich efforts.

So I want to thank Joe Nye, the author of "The Future of Power," Gideon Rachman, the author of "Zero-Sum Future." Again, the books are out there. If you get them, you will stimulate the economy, or certainly their economies. And I want to --

NYE: Help the British economy.

RACHMAN: Exactly. We're in desperate straits.

HAASS: I want to thank them, and I also want to thank you for coming. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

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RICHARD N. HAASS: Good evening. We're starting uncharacteristically late because there was such a crowd that we had to accommodate the throngs.

Welcome, one and all, to the Council on Foreign Relations, and thank you for being here tonight. And I gather there's not just those of you here in the physical sense, but in Washington in the telephonic sense. And the subject, as everyone, I expect, knows, is navigating America's foreign policy in an uncertain world. This is not a meeting about the Navy; broader than that.

The timing could hardly be better, given the events in the Middle East, not just in Egypt and Tunisia but beyond, and then not just simply the events in the Middle East, whether it's continuing questions in Europe as to the Eurozone, ever bigger questions about China and its role, Afghanistan, Iraq, that set of issues; the whole panoply of global issues that's out there, and then the domestic issues here at home that, in many ways, raise challenges or questions about this country's ability to act in the world. And we'd be hard-pressed to come up with two better people to talk about it.

On my immediate left here is Joseph Nye, who's the university distinguished service professor at Harvard's Kennedy School of Government, the author of a lucky 13 books, most recently "The Future of Power." And Joe is simply, I believe, one of the wise men of American foreign policy, and he's a former good colleague when I was also at the Kennedy School. And he's a great friend, personally but also of this institution. He serves on our board.

Gideon Rachman is the chief foreign affairs correspondent of the salmon-colored newspaper -- and for those of you who get it electronically, you'll have to figure it out; if it's salmon-colored in that case, you're in trouble -- and the author of "Zero-Sum Future: American Power in an Age of Anxiety." And, shockingly enough, in the spirit of mercantilism, both books are for sale. (Laughter.) And no other books are for sale. This is a tightly controlled market here tonight.

This meeting is on the record, so anything said will be saved for posterity. We do have people, as I said, joining us over the airwaves. So if you do have your electronics on, please shut them off.

I'll spend a few minutes lobbing softballs at these two foreign-policy heavyweights, and then I will simply get them lazy and sloppy, and then you can really hammer them in the way that they want to be challenged.

Let's start out with a baseline. Here we are. It's early 2011. It's roughly 20 years since the end of the Cold War, roughly a decade -- this September will mark the 10th anniversary of 9/11.

What's going on in the world? I don't mean in Egypt or anywhere, but if one were, in a sense, painting with broad strokes -- Joe, why don't we start with you -- what are the principal broad strokes that help describe the world now that we're seeing?

JOSEPH S. NYE JR.: I argue in my book that there are two great power shifts going on in the 21st century. One is power transition from West to East. Sometimes it's called the rise of China. It's much more than that. It starts with Japan and includes Korea, China and others.

That is something we're familiar with. We've seen this before in history. We've got to manage it well so we don't get into a Thucydides trap or a World War I trap. I think we can manage it. But the other is much more interesting, which is not power transition from one state to another, but what I call power diffusion.

And that's the way in which technology has empowered all sorts of non-state, non-governmental actors to do things which previously were in the domain simply of states or large multinational corporations, if they had a big enough budget. And that means that while governments are the central actors on the stage, the stage is much more crowded.

And the best illustration of that, since you asked for 20 years, is 20 years ago the Worldwide Web had just been invented. I was at the Munich security conference over the weekend, and William Hague gave a speech, and he pointed out in the speech that in 1995, less than 20 years, there were only a few million people on the Worldwide Web. And today there are 1.7 billion. And if you asked how do we understand change in the 21st century, power diffusion seems to me even more than power transition.

HAASS: Gideon, would you disagree with any of that?

GIDEON RACHMAN: A bit of it. I mean, I agree with the first point that I think the major trend is this transition of power from West to East, and also, to some extent, from North to South with the rise of Latin America and so on. And I agree with Joe that I think it should be, in an ideal world, a manageable process.

I think I see rather more tensions coming out of it, though, than perhaps Joe does. I mean, in my book I talk about -- I see the financial crisis of 2008 as a kind of dividing line. And the period that you mentioned, from the fall of the Berlin Wall to 2008, is roughly 20 years.

And I call it an age of optimism for the reason that I think that it was a period when globalization created a set of common interests between the major powers of the world that allowed them all to be reasonably satisfied with the way the world was going, so that China and India were becoming much more prosperous. It was an age of optimism in the European Union with the creation of the Euro, doubling in size of the EU, and also an age of optimism here in the U.S. It was the tech revolution, the unipolar moment. You know all of that.

I think, with the financial crisis and the shift in economic fortunes, which, in a way, was going on before the crisis but has been kind of both crystallized and accelerated by the crisis, financial crisis, it's less clear that the global system is operating in ways that everybody's happy with, so that, for the West, I think there is now real anxiety about the rise of China.

And within that, as Joe says, that's part of a larger phenomenon, the rise of new powers. And I think that, on the other side of the Pacific, in China, you have got a shift, a new mood, a slightly more assertive mood, which we've seen in the last year in a number of foreign-policy clashes. And I think that, as a result, we're potentially entering a more conflictual age. So that's what I see as the major trend.

HAASS: Possibly. And one of the -- we've actually gotten about five minutes into this meeting, and I want to compliment both of you for not having mentioned the "D" word -- decline. But you have both mentioned the rise of China.

So one of the questions is not simply the absolute rise of China, but one of the phenomena of this world is also the relative -- and let me underscore the word relative -- decline of the United States and what you might call the OECD world -- Europe, Japan, whatever.

And your books have a very different perspective on this. You're essentially something of an anti-decliner in terms of either what's happening or what's likely to happen, and I think Gideon is more of a "This is reality, like it or not." Is that fair?

NYE: I think it's true that I am skeptical about the current conventional wisdom. I mean, Americans go through cycles of belief and decline. I mean, after Sputnik, the Russians were 10 feet tall. After Reagan's budget deficits, the Japanese were 10 feet tall. After 2008, which was a huge disruption, the Chinese are 10 feet tall. And a majority of Americans, actually, in one recent poll thought China was bigger than the U.S. now. It's simply not true.

If one looks ahead, not at psychology but at the reality, China has a lot of very real problems. And we have -- I mean, there are demographic problems. The labor force starts to turn downward after the growth in the labor force after 2015. They haven't solved the participation process. India was born democratic. China, as it gets to per capita income around $10 (thousand) to $12,000, is going to have to deal with a demand for participation. Notice I didn't say democracy.

HAASS: Right.

NYE: Demand for participation. They haven't quite figured out how to do that.

HAASS: Even if that's true, even if both China and India and some of these other places stumble a bit and their growth is halved -- let's just argue that -- there's still that relative decline of the United States.

NYE: Oh, if you think of decline and talk about relative rather than absolute, I think the phrase -- I think Fareed Zakaria first started it -- the rise of the rest is a reality. And if you think about the particular role of Asia, you know, in 1800 Asia was half the world's population and half the world's product. By 1900, it was half the world's population and 20 percent of the world's product. And it was essentially the Industrial Revolution.

And what we've been seeing basically since the last half of the 20th century, starting with Japan, and now with then Korea, now with China, and soon to be India, is Asia returning to normal proportions.

HAASS: But do you think the story -- I'm going to press you one more time. Do you think the story of what we're seeing and likely to see over the next few decades is more one of kind of Asia returning, if you will, to its normal position, or do you think that it also is something about the West and the United States and Europe -- and let's include Japan there, if you will -- not able to sustain the sort of trajectory it had; that the West has actually run into, largely for internal reasons, systemic challenges that place now a ceiling on its growth or capacities?

NYE: Well, I think the answer to that is no, to give you a quick answer. But it depends on what we do. There is no one future. We can do things that shoot ourselves in the foot. But by closing ourselves off with trade or immigration and so forth, we can do it.

Let me give you an anecdote from Lee Kuan Yew. I had lunch with him. And I cite this in the book. He said, "You know, the Chinese have 1.3 billion people to draw upon -- a huge pool of talent. The Americans have 7 billion people to draw upon. And what's more, when the Americans take these people, they recombine them in a way which creates diversity and creativity. And the Chinese will remain limited by ethnic Han nationalism." That's the source of my optimism.

Could we spoil that? Absolutely. There are some areas where we overreact to a terrorist incident, close off immigration, become protectionist, and shoot ourselves in the foot. I don't think we will, but we always could.

HAASS: Aren't we kind of doing that now? Well, we're doing that now.

NYE: We're trying, but we don't know how. (Laughter.) I mean, fortunately -- (laughs) -- fortunately, we're not very good at it. You know, go back to the Know-Nothing Party of the 19th century. You could have said the same thing.

HAASS: We no longer have a particularly active trade expansion policy, and we've reduced by more than half the number of visas for high-skilled immigrants.

NYE: Yeah. And I think that, as the economy recovers, I think we're going to recover some of that too.

RACHMAN: Well, to get back to the beginning of your conversation, I think the comparison that Joe makes with previous episodes of panic about decline is a very interesting one, the whole Soviet and Japanese threats. And I think it's worth -- it's a good way of trying to think about China. What is the comparison?

And I think that the Chinese challenge is more real, because if you think about the Soviet challenge, we now know, in retrospect, that, of course, the Soviet economy was a basket case. We didn't know that at the time because they weren't trying to compete on world markets. We know, however, that China is capable of growing at 9 to 10 percent a year, becoming the world's largest manufacturer, et cetera. So it clearly hasn't got that economic flaw, that massive inability to compete.

Similarly, Japan is number one; the famous book by Ezra Vogel. In retrospect, of course, that doesn't seem to me to ever have been plausible for simple population reasons. They would have to have been twice as rich as the average American to have a larger economy than China -- than the U.S.

China -- the sheer scale of the country, the fact that it's four times as many people, means that I think it's pretty inevitable that at some point the Chinese economy will be larger than that of the U.S. Indeed, the latest projection in The Economist was 2019, really not very --

HAASS: Can I interrupt you for one second?

RACHMAN: Yeah.

HAASS: Does that really matter in terms of world power, given the denominator of population, given that everything that goes on in China is divided by 1.3 billion? The fact that it may have an economy in 25 years that's the same size as the United States, is it that significant when our population is going to be one fourth the size?

RACHMAN: Yeah, I think it is. I mean, I think that there's no absolute kind of read across; that, you know, you have "x" size of economy equals "x" amount of power. Obviously it's more complicated than that. But I think you can already see the way in which Chinese economic power now is changing the world.

So, to give you a modest anecdote, you know, there's a sovereign debt crisis in Europe. The Chinese are going around quite visibly, and in the company of photographers, saying, "We'll buy Portuguese bonds. We'll buy Greek bonds." And, you know you think back to the Marshall Plan. You know, a long time ago it was the Americans who had the money.

And the Chinese, I think, are making a point. And they're not doing this out of -- for charitable reasons. There is an element of influence-buying and demonstration of power. And I think, in a broader sense, I think one of the really interesting things that's happening in Asia now is that its strategic and economic interests of a lot of the countries in the region point in different directions, so that for Japan, for Korea, for Australia, their major trading partner now is China. Their security relationship is with the United States.

And I think there's a tension there. And my guess is that unless the Chinese massively overplay their hand and scare their neighbors even more than they're doing now, in the end those economic ties will help to create bit of a -- (inaudible).

NYE: Could I agree and disagree with Gideon? I agree in the sense that size of economy gives you economic power, and that's important. But per capita income is a much better measure of the sophistication of an economy. And while the Chinese will equal us somewhere in the 2020s on size, on per capita income it's not going to be till 2040, 2050.

RACHMAN: Oh, I agree with that, but I think that if you look at the disposition of power -- the use of power in the world -- I mean, Luxembourg already has a higher GDP per capita than the United States, but there are not very many of them, so they're not going to be very powerful.

NYE: But the other point that I would make is that if you look at power, which was Richard's question, GDP is one measure. And per capita GDP is a refinement of that. But you also -- I mean, what I do in my book is look at military power, economic power and soft power.

On military power, the Chinese aren't going to equal the U.S. for a couple of decades or more. And on soft power, the Chinese can't equal the U.S. until they change their domestic political system. Hu Jintao told the 17th Party Congress, "We need to invest in soft power." That's very smart for a country whose hard power is rising and scaring its neighbors. You want to make yourself attractive through soft power. But they're having a very hard time doing it. Every time they have a Beijing Olympics or a Shanghai exposition, every time they lock up a Liu Xiaobo, they shoot themselves in the foot.

And so if you take the dimensions of power, all of them, I just don't see the Chinese equaling the U.S.

RACHMAN: Well, I mean, actually, boringly, can I agree with you? I mean, I think that, you know, when we talk about the rise of China, I'm not talking about China displacing the U.S. as the most powerful country in the world even when its economy is larger than that of the United States, because there are all these other metrics that you mentioned. But what I do think is that you will see a constraint on American power, growing constraint on American power. So the unipolar moment is over. And I think that the U.S. increasingly will find it difficult to get its way.

Let me give you just a couple of concrete examples. The climate-change talks were a very interesting thing, where America turns up, kind of assumes that the world's democracies will be on its side, and, in fact, you know, when it comes down to it, India, Brazil, they're with China. And those kinds of incidents, I think, will multiply.

NYE: Well, I think we would agree that the unipolar moment is over. I never thought it existed in the first place.

RACHMAN: Right.

NYE: I thought that was a Krauthammer myth, which led us into very deep trouble in Iraq, because people believed it. It's just as great a mistake to believe in American ascension as in American decline. But I do think that the point that is worth remembering is that Asia is not one thing. We're seeing the rise of Asia.

But if you look at Japan, you look at India, you look at Vietnam, these countries want the U.S. That has a huge effect on the balance of power. It's as though Canada and Mexico wanted a Chinese military alliance because of their fear of the U.S. We don't threaten our neighbors because we have soft power along with our hard power. China frightens its neighbors because it isn't able to generate that soft power to go with its hard power.

RACHMAN: I mean, I think that's right, but I think that for the reason I mentioned this divergence between economic and strategic interests, the debate is open and ongoing among the neighbors of China and the allies of the U.S. as to where they look. And I think you could even see it in the past year and a half in Japan, where you have Prime Minister Hatoyama coming in, tilting quote noticeably towards China, then replaced by another prime minister who tilts back to the United States.

And I think you will see more and more of these oscillations, because it's a slightly -- it's a difficult and uncertain position. And since you quoted one Singaporean, I'll quote a more junior one, Kisho Mavobani (ph), who, of course, represents a particular Asian's point of view, but, you know, worth listening to.

And he said to me, "Well, the thing is that we know that we do want America to stay in the region in some ways, but we know that China will still be here in a thousand years' time. We don't know America will still be here in a hundred years' time." And I think that question of can America sustain its presence in the Pacific, because of the kind of financial pressures that Richard and others have written about, is a real live question.

HAASS: Can I just break in here for a second?

NYE: Oh, sorry about that. (Laughs.)

HAASS: This is why -- this is why unemployment is so high, because presiders are now unemployed.

Let's just raise one other part of the world, because so much of this has been about Asia. But so much of the news -- and in some ways, if Asia is the most successful theater of the world, at least the most dynamic, the Middle East is the least successful, and in many ways the least dynamic.

What does that tell us, then, about the future, about diffusion of power, about American -- because China is not a significant presence in the Middle East. On the other hand, what we're seeing in many cases are the limits to American power. Is that not something of a glimpse into the future, where a world of diffused power is much more than a pretty unattractive sight, where you've got some fairly aggressive medium-size states?

You've got all sorts of non-state actors, whether it's the Hezbollahs or al Qaedas that are incredibly dangerous, running amok. Our ability to persuade countries to reform tends to be rebuffed. Our ability to persuade countries to compromise at the negotiating table tends to be rebuffed.

Is this not another vision, if you will, of the future?

NYE: Oh, absolutely. I mean, if -- I mean, this is the point why I stressed diffusion of power rather than transition of power among states as the key question.

If you think of the information revolution, it's quite remarkable. The price of computing power went down a thousand-fold in the last quarter of the 20th century. If the price of an automobile had gone down as rapidly, you could buy a car today for five dollars.

What that means is all sorts of individuals and organizations, non-state organizations, are suddenly empowered. They can do things that previously reserved the governments with big corporations. And that's what we're seeing in the Middle East today. The information revolution has provided more information to more people than any time in history.

And what that's done in the Middle East is good and bad. If, on the optimistic side, the old view we had, which you either had the autocrats or the Islamist extremists -- no, there's a middle. And this profusion of information has created a middle. And what's more, it's provided technology and gadgets so that they now can coordinate, whether it's Twitter or Facebook and so forth, to actually do things.

But that middle is a very diverse group. And how we play this could turn out very bad or very good. So it's not necessarily pure pessimism, but it's not pure optimism either. And it's going to be very difficult for a government -- as we see, as we watch the Obama administration trying to walk this tightrope, you have to deal with the governments and hard power, because they're in power, but you also have to realize it's not just whose army wins; it's whose story wins. You have to have a narrative that reaches civil society at the same time. And walking that tightrope is hard, and we've seen some wobbling.

RACHMAN: Yeah. No, and I think it's a very plastic moment. It could turn out -- it could be the best thing that ever happened to the Middle East if, you know, you do actually get a transition away from these old autocracies. But of course, you know, things could go massively wrong as well. That's obvious.

I think, actually, although, in a way, this has been a demonstration of this kind of new cyber world, I think there's a slight danger of exaggerating it. You know, some of the talk is as if there was never a revolution before Facebook. How did the French storm the Bastille without Twitter? It's incredible. (Laughter.)

HAASS: Le Twitter. (Laughter.)

RACHMAN: But -- so, you know, while it's very interesting the way it's shaping events, you know, revolutions have occurred before. And I think, to make another sort of old-fashioned point, I think it's also a reminder of the importance of states still, because what's the question that's preoccupying us? How is this going to turn out? The question is, who ends up in control of the state? And that's what's making people's hearts flutter in the White House or whatever? That's how we'll, in a way, define how the revolution turned out.

HAASS: If you're talking about this world in the Middle East we just described, it's pretty rough around the edges; more broadly, a world of diffuse power. Are you optimistic about the states and others essentially coming to some sort of understanding or consensus about how to govern it? Do you see -- in general, if you were looking at the trends towards order versus disorder, in terms of what you might call the management of the globe, do you -- I mean, you had the failure at Copenhagen. You've got world trade talks essentially on life support, if that. You've got, at best, half-hearted efforts to deal with North Korea and Iran's nuclear programs. And one could go around some other issues as well.

Do you see grounds for optimism that, as this power builds and spreads -- while this information and other technologies get diffused, what gives you a sense that the world would be better for all this?

NYE: Well, I think it's not automatically going to be better. There are lots of things that can go wrong. But I think it'd be a mistake to assume that it's totally unmanageable. There's a lot more governance -- not government -- governance in the world than we realize. Even the failure at Copenhagen was followed by modest rapprochement at Cancun.

And there is a question of -- I mean, the nonproliferation treaty, we have major challenges from North Korea and Iran. But let's face it. Jack Kennedy said there were going to be 25 nuclear-weapon states by 1975, and, in fact, there are nine.

So, you know, it's glass half-full, half-empty. But I think it's a mistake to say, "Oh, because its power is diffusing, we're all going to hell in a hand basket." A lot will depend on America and American power. This is why the declinist view that we're all finished is so dangerous, because it makes us feel draw inward; don't do anything. If the largest country doesn't take the lead in providing these public goods to deal with these kind of challenges, nobody else will.

HAASS: Right.

NYE: And that's why being accurate about the assessment of American power, neither Pollyannish nor too pessimistic, is essential to deal with the kinds of problems you're talking about.

HAASS: Some would argue -- Mike Mullen was here the other day, the chairman of the Joint Chiefs of Staff, and he has been on the record as saying that the greatest threat to American power is the economic foundations and essentially the debt.

And you've been -- you know, you're at the Kennedy School of Government and you're a keen observer of the American political process. Do you have optimism that this country will, if you will, deal with the debt before the bond market deals with us?

NYE: I -- nobody -- if I knew the answer to that, I'd be very wealthy.

HAASS: But it's still -- none of us knows the answer. The question is --

RACHMAN: The question of the bond market --

NYE: Yeah, but I think not before the 2012 election. But it's interesting, if you look at a longer perspective on American politics, the tea party movement really is at 20 percent which is dedicated to solving the deficit problem. And if you look at the Simpson-Bowles commission, they proposed some very sensible things that can be done.

I think the problem is, how do you put that package together? And probably you're not going to put it together until after the 2012 election. But, you know, in principle, one can see a solution. Will it happen or not? I mean, nobody knows. But I would think that it's in the president's interest to grab this issue and make it his issue in 2012.

HAASS: You're an observer of -- you're not an American, but you're an observer. Sometimes observers see us better than we see ourselves. De Tocqueville and some others had some views about that; Mr. Bryce.

RACHMAN: I'm happy to play de Tocqueville with you. (Laughter.)

HAASS: So looking at us, do you share Professor Nye's optimism that essentially, two years down the road, we're more likely or at least fairly likely to get our domestic house in order?

RACHMAN: Well, look, I'm sort of -- if I think about modern-day politics, it makes me kind of pessimistic. If I think about the kind of sweep of history, I'm more optimistic. And what I mean by that is you look at the mess in Washington, the polarization of the debate, it does look pretty hopeless. I can't see them reaching some sort of agreement to reduce the deficit.

It may be that America, you know, has more time before the bond markets reap revenge on it. I mean, if you look, the Japanese seem to have managed to get to some incredible level of debt-to-GDP ratio. They're still going. So -- but what I mean about being optimistic about the great sweep of history is that although, you know, my book has plenty of gloom in it, I did, at the end, try to draw back and remember that, you know, there have been other big crises of liberal economies and liberal politics, most notably the 1930s, you know, when things were much, much worse economically, when the threats overseas were much worse. And many people did say, you know, actually, liberal democracy doesn't work, I mean, even in our own societies, and moved off to the extremes. And actually, in the end, they were wrong.

So, you know, one has to kind of keep the faith, even if you can't quite see your way through within the next three to five years.

HAASS: Well, on these positive notes, let me open it up. If you'd raise your hand, wait for a microphone, and then identify yourself. And please keep your questions to a single one and be succinct. We would be forever grateful.

Yes, sir.

QUESTIONER: Hi. My name is Khalid Azim.

Is there such a thing as moral power? And, if so, does the U.S. have it?

NYE: Well, my view is clearly yes, that -- in both senses, that there is moral power. That's what I mean when I talk about soft power. Power is the ability to get others to do what you want. You can do it through coercion -- sticks -- payments -- carrots -- or traction and persuasion. And having a moral position moves people. It attracts them. It persuades them. When we live up to our ideals, which we don't always, we do indeed have that moral power. And that's what soft power is about.

RACHMAN: Can I just quickly answer that? I mean, I think that -- I think -- I agree that America does have enormous moral power. I think there's -- one thing we might underestimate, though, is the extent to which the Chinese have some of that as well.

I mean, I think one of the interesting things at Copenhagen was the way they were able to position themselves as the spokespeople of the developing world, to say, "Look, you guys consume this enormous amount of energy and you're now saying to us we can't aspire to the same sorts of lifestyles as you. Who are you to say that?" And that had a big resonance.

HAASS: All the way in the back. Is that Mr. Rubin?

QUESTIONER: Yes.

Thank you, Richard.

I guess this is more for Gideon than Joe, but if you could both address it. Why, in drawing a straight line of Chinese growth in the economic side, you don't take into account the many people who believe that China's ability to stay stable politically takes a big chunk out of that straight line and raises very serious questions when you throw out where China will be in 20 years economically?

Using a statistic about economics, there's a whole bunch of other factors, including the huge labor unrest and the battles against the center and all of those things. So could you address the stability of China and how that would factor into this straight line of economic growth? Thank you.

RACHMAN: That's obviously an incredibly important point. And you're right; straight-line projections are usually wrong. And China has enormous problems in environmental, political transitions to go through.

However, you know, I don't think that even if one factors in a great deal of instability in China, that will be enough to kind of -- I mean, we, in 10 years' time, 15 years' time, say, "What were we thinking about when we thought China would be a great power?" They may be a very troubled power, and their growth may slow down. But simply given the size of the country and the momentum of economic growth over the last 30 years, I think they will be bigger players in the future.

Just to give you an analogy, I mean, if you look at the rise of Germany in the 1870s -- I don't mean that this means war, but in an economic sense, you know, this is a country that goes through enormous turmoil. They go through the defeat in the First World War, hyperinflation, Great Depression, Second World War. By the 1950s, they're actually still one of the most developed economies in the world.

So you can have enormous instability. But if you've got a country that's somehow got the hang of economic growth, is quite large, is quite productive, it doesn't mean that the whole thing gets derailed at some point.

HAASS: All the way in the back. Yes, sir.

QUESTIONER: Professor Nye --

HAASS: You have to introduce yourself.

QUESTIONER: Chung Weihua (ph).

Professor Nye, I'm wondering if you graded Obama demonstration in how it uses power, according to what you said in the book. What score you would give in its dealing with Egypt in the past two weeks and in dealing with China in the past year?

NYE: Well, I think when Obama came into power, he had to restore the loss of American soft power that had occurred in the Bush years. This is not a political judgment. It's simply reporting what polls say. And Hillary Clinton talked about smart power, which is the ability to do both hard and soft power.

Obama gave a series of speeches in Turkey, Cairo, to the U.N. and elsewhere, and tried to restore that soft power. And the polls show that some of that worked. But when you look at the longer term, you have to ask, do the actions reinforce the words? And some of these, it's too soon to know.

I think, frankly, when the Obama administration came into office in relation to China, they were a little bit too naive, too optimistic. The Chinese, in fact, thought the Americans were in decline. So as Obama tried to compromise with China, they basically thought, "Ah, it proves our point. The Americans are in decline." I think the net effect of that was bad for China. Its hubris led it to spoil its relations with Japan, Vietnam and India, and also with the United States. I hope that's now rectified after the Hu Jintao visit and that China is back to the old Deng Xiaoping advice of keep a low profile.

On Egypt, I think they're wrestling with this dilemma I described earlier, which is how do you use this soft power that was expressed in the Cairo speech while also realizing that when you're talking about balancing Iranian power or preserving the peace process and not seeing a war with Israel, you've got to deal with the government.

And that is a very difficult tightrope to walk on so that you're dealing with government, which is essential for the hard power, but also creating a narrative so you don't alienate civil society, which is the source of stability and attraction for the long run. And I think they've wobbled a bit on that tightrope, but, in my opinion, they haven't yet fallen off.

HAASS: Sir.

QUESTIONER: Stephen Black (sp).

The United States exercises enormous power -- you might call it dumb power, perhaps -- by being the largest debtor, having the largest and richest markets, being the largest consumer. If the United States -- as the fat boy in the boat, if the United States doesn't take the most active leadership in global governance, is there a formula to maintain or to create stable global governance without the U.S. taking the leadership role?

RACHMAN: Well, I mean, I think, you know, we referred to this before, that obviously the U.S. is the most plausible leader. I mean, I think one of the reasons that the G-20 is now a slightly troubled organization is because America is the only obvious leader, but it's not quite powerful enough.

And so, you know, at the time of the financial crisis, everybody said -- the analogy people looked for was the new Bretton Woods. They said, "We need a new Bretton Woods." And yet if you look back at the situation when Bretton Woods happened, the U.S. was incomparably the most powerful country in the world. Essentially -- I mean, if you read the Skidelsky book on Keynes, the Americans basically designed the institutions and then were able to impose them on everyone, including the British, who, although they didn't much like it, weren't in a position to fight back.

And I think that in this current situation, America is the most powerful country in the world, but it's not able to push everybody in the way that it was, say, at the time of Bretton Woods. So you tend to get deadlock, you know, on a number of issues -- climate change, global economic imbalances.

The most they'll do is they'll agree they need to agree, but they can't get there, because the national interests come into play, so that although there's a recognition that there's a common problem that can only be solved internationally -- and that is a good starting point on a range of issues -- when they actually get down to discussing the nuts and bolts -- as I say, climate change, global economic imbalances, nuclear proliferation -- people's interests come to the fore and then they get deadlock and you don't get an agreement.

NYE: Let me just agree with what Gideon just said, but also warn us all against what I call the golden glow of the past. In 1945 to '50, Americans had a nuclear monopoly and nearly half of world product, and yet we still weren't able to prevent the so-called loss of China or to win the Korean War. So this idea that once we were this hegemon that could do whatever we wanted, and today we're down in this poor --

HAASS: That was the first unipolar --

NYE: Yeah, this is the golden glow of history.

HAASS: Sure, all the way in the back.

QUESTIONER: Thank you very much. Mahesh Kotecha.

You know, my question is, what is the great benefit of being the hegemon? And what's wrong with having multipolar world? We believe in the U.S. in checks and balances. Why not worldwide?

NYE: Well, in my book, I argue that power isn't good or bad per se. It's like calories in your diet. Too much is bad for you. Not enough is bad for you. And so the idea -- I don't think the United States should try to be a hegemon. I think it's a terribly imprecise and rather useless and confusing word.

But I do think that if the largest country doesn't help to take the lead in organizing others to produce public goods, it's very hard to see smaller countries doing it. So why should we concern ourselves about American power? Not to be able to say, "I'm number one." It's not a Super Bowl. It's a question of can you produce the kind of order, faced with the diffusion of power that Richard talked about. And without the United States working on that, I don't see other countries being able to do it.

HAASS: Why is that? Why is it other countries can't do it or won't do it? Why is it that the United States is one of the rare countries that thinks in those kind of global -- what you academics would call global public goods and things like that? And the Chinas and the Indias and even Europes at times don't think in those terms. What's it about this country?

NYE: Well, it's not about this country. Actually, the theory of collective action or public good, as Mancur Olson points out, that when you have a large number, it's a lot easier to free ride rather than bear the burden. The reason the largest bears the burden is because they're going to see the benefits of the burden. For the small, their actions are so insignificant that it's easier to free ride.

China is now getting to a position analogous to where the United States was back in the 1920s and '30s. After Britain no longer was providing these goods, Americans were free riders. It's not our culture. We used to love to free ride. And it produced the '30s and World War II.

So what we've got to do now is get the Chinese and others to start pulling their share.

RACHMAN: I mean, I think that it's interesting. There's divergence of opinion in Europe, I think, between elites and the public as to whether we actually want to be a major power. So you go to Brussels and they say, "Well, we must mobilize our power and we must -- you know, it's terrible that Europe's not more of a player in the world."

But actually, one of the reasons Europe's not more of a player in the world is that there is no constituency for, say, increased military spending. Europe wants to just kind of put the blanket over its head. And it was sort of summed up for me where actually I saw a French civil servant. There was a discussion of the kind of rising tensions in the Pacific. And the French civil servant asked the Chinese diplomat there, "What is Europe's role in there? Are we irrelevant?" And then he said, "I hope the answer is yes," because he didn't -- you know, "It suits us to let the Americans kind of look after it."

HAASS: Lots of hands. Sure.

QUESTIONER: Thank you.

We've spoken a lot about --

HAASS: Introduce yourself so we all know who you are.

QUESTIONER: Sorry. Matt Hooper (sp).

We've spoken a lot about the rise of the East, but I'm also curious about power diffusion, which Professor Nye mentioned earlier. What are your short-term thoughts -- next two years, three years -- when governments can still so quickly control things like the Internet, not necessarily our long-term implications, but how are these next few years going to be affected by this government-Worldwide Web relationship?

NYE: Well, I have a chapter in my book on cyber power. And what it points out, that it's a mistake to be a cyber optimist or libertarian, the view that it's transforming the world. Governments are still able to control the Internet, but it gets leakier and leakier. Egypt shut off the Internet at considerable expense. I mean, if you want to run a banking system or a trade system, you pay a high price when you do that.

But there are a lot of sources of information. Land lines weren't cut off, and you could also pick up a cell phone and use this device "Speak to Tweet," so you called a number in Europe or elsewhere and you were able then to get a Twitter account and a tweet on the Internet.

So the point is that there are ways to work around this. Governments still have sovereign power over the parts of the Internet that are within their borders, and it's silly to think that that is gone. But it's getting leakier and leakier. Even the great fire wall of China is getting leakier.

HAASS: Sure.

QUESTIONER: Nick Branford (sp), Lazard.

How do you think the West should handle Iran?

NYE: Your turn. (Laughter.)

RACHMAN: Thank you.

HAASS: Deftly, I think, is the word.

RACHMAN: Well, you know, I'm not privy to the intelligence. There's this endless debate, you know, about how close are they to the bomb. I mean, I think I've been hearing for the last 10 years they're one or two years away and that now there are people actually saying they've been very seriously disrupted by Stuxnet and so on. So a lot depends on that question, which, you know, I don't have the answer to.

I mean, if you think that they're a few years away perhaps because of the cyber disruption, then the only sensible thing to do is to play for time. We now know, because of the aborted green revolution, this is an unstable country, a country that could change, or the regime is unstable. You know, clearly we don't want a military conflict with them if it can be avoided at all.

So I think you just monitor them and cross your fingers that the country changes.

HAASS: I'm not only calling on men, but so far, at least, not one woman has raised her hand since this meeting began. So I know I'm going to get criticized afterwards for my selection bias, but I want to point out that it's not a selection bias. It's a --

NYE: There we go.

HAASS: (Laughs.)

QUESTIONER: Min Tufain (sp) with the U.N. Foundation.

You mentioned earlier, Mr. Nye, about -- Professor Nye -- that maybe it's not part of the U.S. culture to take the lead in the world and that we have been a free rider in the past. Well, what about American exceptionalism? Is that something that we need to -- do we need to have that sense for us to lead in the world?

NYE: American exceptionalism is interesting. In one sense, President Obama is right that every country thinks it's exceptional. But it's also true that American exceptionalism really goes back to our founding. I mean, you know, the city on the hill, which Reagan transformed into shining city on the hill, was John Winthrop.

I mean, this is 17th century. We believe that we've broken away from that bad old world back there in Europe. Remember, these were British colonists who believed that, because of -- let me call them strange religious beliefs, but whatever. I happen to come from a Puritan background. My family got here in 1639, so I can criticize these people. (Laughter.)

But they had very odd, in the Church of England sense, religious beliefs. And we were exceptionalists in that sense. And that has its bad side. It makes us think we're holier than thou or better than others. It also has its good side. It means that we think we have to stand for human rights and liberty, that there is something about us that, even though we don't always live up to it, we have to keep it. And that's the source of our soft power.

Think back to the Vietnam period, when people were demonstrating in the streets around the world against America, and people thought America was absolutely terrible. What were the demonstrators singing? Not the Internationale of the communists -- Martin Luther King's "We Shall Overcome." That's real soft power. And that grows out of American exceptionalism.

HAASS: Sure.

QUESTIONER: Hi. Lane Greene from The Economist. Hi, Gideon.

HAASS: I think The Economist should ask the Financial Times a question. (Laughter.)

QUESTIONER: I apologize --

RACHMAN: (Inaudible) -- The Economist.

NYE: Let's get ugly here.

QUESTIONER: A long-time correspondent of The Economist, but my question is for Professor Nye. Catch you later, Gideon. (Laughter.)

My question is about -- we've talked about soft power a lot. And the word public good, the phrase public good, has come up quite a bit. And the Internet has been talked about quite a bit as well. We've given -- we've diffused more power, the United States has, by the creation of the Internet and the Worldwide Web, and even now Facebook and Twitter.

Do foreigners think about these as American products when they get on them, whether to communicate with one another not about America, or when they get on these products to take up cyber arms against America? Why doesn't our gift of this diffusion of power to the world redound to our credit more than it actually does?

NYE: Well, I should be very nice in answering The Economist's question, since you called my book "rigorous and convincing." (Laughter.)

HAASS: We'll see if your answer is now.

NYE: I think the danger is thinking that somehow cyber is all good. It's good and it's bad. I mean, it can be used for malevolence against us. It can also be used for Internet freedom, which I think, in the long run, helps us.

One problem for American policy is we haven't quite figured out how to deal with this. Hillary Clinton gave a wonderful speech last January after the problem between China and Google about how we stood for Internet freedom. And then along comes Wikileaks and we want to censor. You know, we haven't figured out how we fit all this together. Unless we have a more consistent narrative on our own sense, we're not going to succeed as we need to in this cyber world.

HAASS: We're actually doing some interesting work here at the Council on just this. What would be the rules that govern, if you will, this new space, literally and figuratively? Because you're right. Like all technologies, there's positive and negative aspects. There's offense. There's defense. And it really is probably one of the most unregulated frontiers out there. So we're all playing catch-up, not to be confused with ketchup.

Sir.

QUESTIONER: Anton Kuslonov (sp) with TIAA-Cref.

Coming back to the discussion on economic policy, we have a very interesting juxtaposition with discussions in the U.S. whether we should cut the deficit and sort of like going to economic austerity, while at the same time in the U.K. that's actually in the process of being implemented.

And so how do you gentlemen see that development taking place in the next couple of years? And what can we learn from each other?

RACHMAN: Well, I mean, it's quite early days in Britain. And we got a bit of a fright, because the last quarter GDP figures were really bad. The economy actually shrank. And so there is anxiety that maybe they are cutting too fast. I think Britain's cutting faster even than Greece, which is quite remarkable.

On the other hand, you know, we -- the argument the government makes, and maybe they're right, is that we can't afford to be as relaxed as the United States are, because we don't have a reserve currency. You know, we're that much more vulnerable to the markets. And yet the Labour Party, the opposition, actually do look to the U.S. and say, "Look, why are we pursuing this kind of crazy policy when the Americans are correctly continuing with something that looks more Keynesian?" although the tap's been turned off a bit.

So, yeah, you know, if you're a disinterested observer -- the Chinese, perhaps -- it will be a very interesting controlled experiment to see who gets it right.

HAASS: Two very different economic approaches, two very different political models.

Sure, Rick. I'm sorry, go ahead. Yes, sir.

QUESTIONER: Alfred Youngwood.

A simple question. Egypt -- any words of wisdom?

RACHMAN: Okay, you gave me Iran. You can have this one.

NYE: (Laughs.) I think that what Hillary Clinton said at the Munich security conference last weekend is right as a general attitude toward American policy. We would like to see an orderly transition to democracy. Now, it's a lot easier to say that as your slogan than it is to figure out how to do it.

I'm not a great expert on Egypt or the Middle East, but I think what it's going to require is some form of giving away -- or Mubarak might be able to transfer his power, as he's done in the past, when he was ill, to somebody, so that you don't trigger this clause which makes an election -- the speaker becomes the head of the government, and then you immediately have an election, which I think it's much too early for an election.

I think if you can get rid of the emergency law and get rid of some of the bad aspects of the constitution by having a constitutional convention or a body which changes it, and create a constitutional structure in which you then can try to build some parties, then you might have the chance to make progress toward an election at some point.

Notice, all these are big ifs, and it's a lot easier to say that this is a path than it is to actually carry it out and do it. But again, I mean, the current situation in Egypt could go either direction. There's a new middle, and that middle includes some good things and some bad things. And trying to figure out how we work with that middle, and at the same time work with the existing government, which we have to do, is very hard.

So Hillary's slogan, you know, "an orderly transition to democracy," is the right attitude. The details of implementing that are very hard.

HAASS: Let me ask a related question, though, which is, in this world of diffuse power, relative American decline but still significant capability to effective ends, to what extent is it -- should it be a necessity? Should it be a priority? Is it simply desirable? Is it none of the above that the promotion of democracy inform U.S. foreign policy? How should we think about that? Or should we mainly focus on how countries essentially act beyond their borders? How do we think about this question?

NYE: Well, we went through a period under the Bush administration where excessive zeal for the promotion of democracy contributed to what somebody once called a war of choice --

HAASS: A wise person.

NYE: -- rather than a war of necessity. And we paid a heavy price for it. And in a sense, it discredited the idea of democracy promotion.

If you think of democracy as something which is in our interest in the long run, but getting there often can lead to problems for us, I think trying to get that balance where you attract people to democracy rather than compel people to democracy is the right attitude.

So I think the way the administration has handled affairs in Egypt, like, for example, using both our hard power of aid and our soft power of close relations with the Egyptian military, to say, "Don't shoot these protesters," I think that's correct, and that's a proper use of power. But if we were to say, "Elections now," or, you know -- I mean, that would be the kind of mistake we made in Iraq.

So somewhere in between those two, there is a way of threading this needle.

HAASS: Yes, ma'am.

QUESTIONER: Catherine Lancaster (sp).

I'm wondering if -- does the U.S.'s ability to exercise soft power rely on people wanting to be like the U.S.? And, if so, does our current ability to -- our inability to get our house in order, with the tea party, with the economy, will that weaken our soft power going forward?

NYE: Well, I'd like to hear Gideon -- I'll answer that, but I think it'd be interesting to have a non-American answer to that as well.

RACHMAN: Well, also, I mean, I think foreigners have quite a nuanced view of America. They see a lot of America. And I think that, you know, it depends which America they're reacting to, so that, you know, if you look at European reactions to the U.S., there was a kind of euphoric reception to Obama because he was the anti-Bush. He was the America they liked, and Bush was the American that they don't like. And now the least popular American in Europe is Sarah Palin.

So there are aspects of the United States that Europeans and, I think, others as well find kind of a bit scary, kind of nationalistic, et cetera. And there are aspects of America that are still immensely attractive. It slightly depends which are accented.

On the question of the competence of the United States, yeah, I think that is part of the whole soft-power question. You know, I think that if America appears kind of deeply troubled, unable to get its own house in order, then some of those values that you talk about promoting, like democracy promotion, the promotion of free markets, you know, people say, "Well, hang on. Why are we listening to this?"

And again, there's a possibly apocryphal story where I think some Chinese official said, you know, "Just to think that Hank Paulson used to come here and give us lectures, you know, on how to order our affairs, and now look at them." So that is a danger.

NYE: Let me just add -- I mean, I agree with what Gideon just said. Let me add to that.

The United States suffered a blow to its soft power by the mess it made in 2008, particularly our preaching at others about how great we knew how to run a financial system. I mean, it was a real blow to Wall Street's soft power. But if that were all there were to American soft power, then I would really be worried.

Let me point out something else, which was a conversation that I had with probably the second most powerful person in the British government in the fall of 2008, after the collapse, but also after the election. He said, "You know, it's fascinating." He said, "Last year the conventional wisdom was you had to have a family fortune or a lot of money and you had to be part of a family dynasty or a big-name dynasty, and American democracy was corrupted and there wasn't -- you know, the system was terrible."

He said, "Then you went and you elected an African-American with a funny name who had no family money or big sources of money to begin with." He said, "All of a sudden you changed the way the world looked at America." He said, "That is where America's soft power comes from."

So, yeah, we're very messy. The closer up you look at us, at our political process, the messier it is. But if we can keep that larger, to quote Reagan, "shining city on a hill," then I think we're going to come through it okay.

RACHMAN: Could I just add a sentence on that? I mean, I think it's relevant to Egypt, these two views of America that are competing, and it (meant ?) often the same mind, so that if the Egyptian people in the street look at America, in some sense it's an inspiration, as the land of Facebook and so on, as the land where you do have free elections.

On the other hand, there's the America that's been propping up Mubarak for 30 years. Actually, they both exist. And which of those two narratives prevails, I think, is really important to how Egypt turns out.

HAASS: Alas -- and I want to apologize for those I didn't call on -- we've about run out our string.

I've got two housekeeping things to do. One is two upcoming meetings I want to let you all know. Tomorrow morning we've got a meeting here at breakfast with Ken Rogoff, who's published by far the most successful economics book in recent times, and Raghuram Rajan to talk about currency wars as part of our McKenzie (sp) series. And that runs from 7:45 to 9:00. Now, if you do want to go to that, you still have to go home tonight. (Laughter.)

And then, in about a week's time, on February 15th, on Tuesday evening, we're going to be marking the 20th anniversary of the Gulf War and Operation Desert Storm. And people such as Brent Scowcroft, Paul Wolfowitz and yours truly will gather in Washington, but New York members will have a chance to hear us essentially reminisce and reflect upon the lessons, what we got right and what we got wrong in that experience.

Again, what you've heard here tonight are two people who I think did one of the most important things in the business, which is they wrote big books. I don't mean big in the sense of telephone; I mean big in the sense of ideas. These are books that essentially grapple with the international system as it is evolving. And whether you agree or not is almost secondary. You learn a lot. These are rich -- these are rich efforts.

So I want to thank Joe Nye, the author of "The Future of Power," Gideon Rachman, the author of "Zero-Sum Future." Again, the books are out there. If you get them, you will stimulate the economy, or certainly their economies. And I want to --

NYE: Help the British economy.

RACHMAN: Exactly. We're in desperate straits.

HAASS: I want to thank them, and I also want to thank you for coming. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

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RICHARD N. HAASS: Good evening. We're starting uncharacteristically late because there was such a crowd that we had to accommodate the throngs.

Welcome, one and all, to the Council on Foreign Relations, and thank you for being here tonight. And I gather there's not just those of you here in the physical sense, but in Washington in the telephonic sense. And the subject, as everyone, I expect, knows, is navigating America's foreign policy in an uncertain world. This is not a meeting about the Navy; broader than that.

The timing could hardly be better, given the events in the Middle East, not just in Egypt and Tunisia but beyond, and then not just simply the events in the Middle East, whether it's continuing questions in Europe as to the Eurozone, ever bigger questions about China and its role, Afghanistan, Iraq, that set of issues; the whole panoply of global issues that's out there, and then the domestic issues here at home that, in many ways, raise challenges or questions about this country's ability to act in the world. And we'd be hard-pressed to come up with two better people to talk about it.

On my immediate left here is Joseph Nye, who's the university distinguished service professor at Harvard's Kennedy School of Government, the author of a lucky 13 books, most recently "The Future of Power." And Joe is simply, I believe, one of the wise men of American foreign policy, and he's a former good colleague when I was also at the Kennedy School. And he's a great friend, personally but also of this institution. He serves on our board.

Gideon Rachman is the chief foreign affairs correspondent of the salmon-colored newspaper -- and for those of you who get it electronically, you'll have to figure it out; if it's salmon-colored in that case, you're in trouble -- and the author of "Zero-Sum Future: American Power in an Age of Anxiety." And, shockingly enough, in the spirit of mercantilism, both books are for sale. (Laughter.) And no other books are for sale. This is a tightly controlled market here tonight.

This meeting is on the record, so anything said will be saved for posterity. We do have people, as I said, joining us over the airwaves. So if you do have your electronics on, please shut them off.

I'll spend a few minutes lobbing softballs at these two foreign-policy heavyweights, and then I will simply get them lazy and sloppy, and then you can really hammer them in the way that they want to be challenged.

Let's start out with a baseline. Here we are. It's early 2011. It's roughly 20 years since the end of the Cold War, roughly a decade -- this September will mark the 10th anniversary of 9/11.

What's going on in the world? I don't mean in Egypt or anywhere, but if one were, in a sense, painting with broad strokes -- Joe, why don't we start with you -- what are the principal broad strokes that help describe the world now that we're seeing?

JOSEPH S. NYE JR.: I argue in my book that there are two great power shifts going on in the 21st century. One is power transition from West to East. Sometimes it's called the rise of China. It's much more than that. It starts with Japan and includes Korea, China and others.

That is something we're familiar with. We've seen this before in history. We've got to manage it well so we don't get into a Thucydides trap or a World War I trap. I think we can manage it. But the other is much more interesting, which is not power transition from one state to another, but what I call power diffusion.

And that's the way in which technology has empowered all sorts of non-state, non-governmental actors to do things which previously were in the domain simply of states or large multinational corporations, if they had a big enough budget. And that means that while governments are the central actors on the stage, the stage is much more crowded.

And the best illustration of that, since you asked for 20 years, is 20 years ago the Worldwide Web had just been invented. I was at the Munich security conference over the weekend, and William Hague gave a speech, and he pointed out in the speech that in 1995, less than 20 years, there were only a few million people on the Worldwide Web. And today there are 1.7 billion. And if you asked how do we understand change in the 21st century, power diffusion seems to me even more than power transition.

HAASS: Gideon, would you disagree with any of that?

GIDEON RACHMAN: A bit of it. I mean, I agree with the first point that I think the major trend is this transition of power from West to East, and also, to some extent, from North to South with the rise of Latin America and so on. And I agree with Joe that I think it should be, in an ideal world, a manageable process.

I think I see rather more tensions coming out of it, though, than perhaps Joe does. I mean, in my book I talk about -- I see the financial crisis of 2008 as a kind of dividing line. And the period that you mentioned, from the fall of the Berlin Wall to 2008, is roughly 20 years.

And I call it an age of optimism for the reason that I think that it was a period when globalization created a set of common interests between the major powers of the world that allowed them all to be reasonably satisfied with the way the world was going, so that China and India were becoming much more prosperous. It was an age of optimism in the European Union with the creation of the Euro, doubling in size of the EU, and also an age of optimism here in the U.S. It was the tech revolution, the unipolar moment. You know all of that.

I think, with the financial crisis and the shift in economic fortunes, which, in a way, was going on before the crisis but has been kind of both crystallized and accelerated by the crisis, financial crisis, it's less clear that the global system is operating in ways that everybody's happy with, so that, for the West, I think there is now real anxiety about the rise of China.

And within that, as Joe says, that's part of a larger phenomenon, the rise of new powers. And I think that, on the other side of the Pacific, in China, you have got a shift, a new mood, a slightly more assertive mood, which we've seen in the last year in a number of foreign-policy clashes. And I think that, as a result, we're potentially entering a more conflictual age. So that's what I see as the major trend.

HAASS: Possibly. And one of the -- we've actually gotten about five minutes into this meeting, and I want to compliment both of you for not having mentioned the "D" word -- decline. But you have both mentioned the rise of China.

So one of the questions is not simply the absolute rise of China, but one of the phenomena of this world is also the relative -- and let me underscore the word relative -- decline of the United States and what you might call the OECD world -- Europe, Japan, whatever.

And your books have a very different perspective on this. You're essentially something of an anti-decliner in terms of either what's happening or what's likely to happen, and I think Gideon is more of a "This is reality, like it or not." Is that fair?

NYE: I think it's true that I am skeptical about the current conventional wisdom. I mean, Americans go through cycles of belief and decline. I mean, after Sputnik, the Russians were 10 feet tall. After Reagan's budget deficits, the Japanese were 10 feet tall. After 2008, which was a huge disruption, the Chinese are 10 feet tall. And a majority of Americans, actually, in one recent poll thought China was bigger than the U.S. now. It's simply not true.

If one looks ahead, not at psychology but at the reality, China has a lot of very real problems. And we have -- I mean, there are demographic problems. The labor force starts to turn downward after the growth in the labor force after 2015. They haven't solved the participation process. India was born democratic. China, as it gets to per capita income around $10 (thousand) to $12,000, is going to have to deal with a demand for participation. Notice I didn't say democracy.

HAASS: Right.

NYE: Demand for participation. They haven't quite figured out how to do that.

HAASS: Even if that's true, even if both China and India and some of these other places stumble a bit and their growth is halved -- let's just argue that -- there's still that relative decline of the United States.

NYE: Oh, if you think of decline and talk about relative rather than absolute, I think the phrase -- I think Fareed Zakaria first started it -- the rise of the rest is a reality. And if you think about the particular role of Asia, you know, in 1800 Asia was half the world's population and half the world's product. By 1900, it was half the world's population and 20 percent of the world's product. And it was essentially the Industrial Revolution.

And what we've been seeing basically since the last half of the 20th century, starting with Japan, and now with then Korea, now with China, and soon to be India, is Asia returning to normal proportions.

HAASS: But do you think the story -- I'm going to press you one more time. Do you think the story of what we're seeing and likely to see over the next few decades is more one of kind of Asia returning, if you will, to its normal position, or do you think that it also is something about the West and the United States and Europe -- and let's include Japan there, if you will -- not able to sustain the sort of trajectory it had; that the West has actually run into, largely for internal reasons, systemic challenges that place now a ceiling on its growth or capacities?

NYE: Well, I think the answer to that is no, to give you a quick answer. But it depends on what we do. There is no one future. We can do things that shoot ourselves in the foot. But by closing ourselves off with trade or immigration and so forth, we can do it.

Let me give you an anecdote from Lee Kuan Yew. I had lunch with him. And I cite this in the book. He said, "You know, the Chinese have 1.3 billion people to draw upon -- a huge pool of talent. The Americans have 7 billion people to draw upon. And what's more, when the Americans take these people, they recombine them in a way which creates diversity and creativity. And the Chinese will remain limited by ethnic Han nationalism." That's the source of my optimism.

Could we spoil that? Absolutely. There are some areas where we overreact to a terrorist incident, close off immigration, become protectionist, and shoot ourselves in the foot. I don't think we will, but we always could.

HAASS: Aren't we kind of doing that now? Well, we're doing that now.

NYE: We're trying, but we don't know how. (Laughter.) I mean, fortunately -- (laughs) -- fortunately, we're not very good at it. You know, go back to the Know-Nothing Party of the 19th century. You could have said the same thing.

HAASS: We no longer have a particularly active trade expansion policy, and we've reduced by more than half the number of visas for high-skilled immigrants.

NYE: Yeah. And I think that, as the economy recovers, I think we're going to recover some of that too.

RACHMAN: Well, to get back to the beginning of your conversation, I think the comparison that Joe makes with previous episodes of panic about decline is a very interesting one, the whole Soviet and Japanese threats. And I think it's worth -- it's a good way of trying to think about China. What is the comparison?

And I think that the Chinese challenge is more real, because if you think about the Soviet challenge, we now know, in retrospect, that, of course, the Soviet economy was a basket case. We didn't know that at the time because they weren't trying to compete on world markets. We know, however, that China is capable of growing at 9 to 10 percent a year, becoming the world's largest manufacturer, et cetera. So it clearly hasn't got that economic flaw, that massive inability to compete.

Similarly, Japan is number one; the famous book by Ezra Vogel. In retrospect, of course, that doesn't seem to me to ever have been plausible for simple population reasons. They would have to have been twice as rich as the average American to have a larger economy than China -- than the U.S.

China -- the sheer scale of the country, the fact that it's four times as many people, means that I think it's pretty inevitable that at some point the Chinese economy will be larger than that of the U.S. Indeed, the latest projection in The Economist was 2019, really not very --

HAASS: Can I interrupt you for one second?

RACHMAN: Yeah.

HAASS: Does that really matter in terms of world power, given the denominator of population, given that everything that goes on in China is divided by 1.3 billion? The fact that it may have an economy in 25 years that's the same size as the United States, is it that significant when our population is going to be one fourth the size?

RACHMAN: Yeah, I think it is. I mean, I think that there's no absolute kind of read across; that, you know, you have "x" size of economy equals "x" amount of power. Obviously it's more complicated than that. But I think you can already see the way in which Chinese economic power now is changing the world.

So, to give you a modest anecdote, you know, there's a sovereign debt crisis in Europe. The Chinese are going around quite visibly, and in the company of photographers, saying, "We'll buy Portuguese bonds. We'll buy Greek bonds." And, you know you think back to the Marshall Plan. You know, a long time ago it was the Americans who had the money.

And the Chinese, I think, are making a point. And they're not doing this out of -- for charitable reasons. There is an element of influence-buying and demonstration of power. And I think, in a broader sense, I think one of the really interesting things that's happening in Asia now is that its strategic and economic interests of a lot of the countries in the region point in different directions, so that for Japan, for Korea, for Australia, their major trading partner now is China. Their security relationship is with the United States.

And I think there's a tension there. And my guess is that unless the Chinese massively overplay their hand and scare their neighbors even more than they're doing now, in the end those economic ties will help to create bit of a -- (inaudible).

NYE: Could I agree and disagree with Gideon? I agree in the sense that size of economy gives you economic power, and that's important. But per capita income is a much better measure of the sophistication of an economy. And while the Chinese will equal us somewhere in the 2020s on size, on per capita income it's not going to be till 2040, 2050.

RACHMAN: Oh, I agree with that, but I think that if you look at the disposition of power -- the use of power in the world -- I mean, Luxembourg already has a higher GDP per capita than the United States, but there are not very many of them, so they're not going to be very powerful.

NYE: But the other point that I would make is that if you look at power, which was Richard's question, GDP is one measure. And per capita GDP is a refinement of that. But you also -- I mean, what I do in my book is look at military power, economic power and soft power.

On military power, the Chinese aren't going to equal the U.S. for a couple of decades or more. And on soft power, the Chinese can't equal the U.S. until they change their domestic political system. Hu Jintao told the 17th Party Congress, "We need to invest in soft power." That's very smart for a country whose hard power is rising and scaring its neighbors. You want to make yourself attractive through soft power. But they're having a very hard time doing it. Every time they have a Beijing Olympics or a Shanghai exposition, every time they lock up a Liu Xiaobo, they shoot themselves in the foot.

And so if you take the dimensions of power, all of them, I just don't see the Chinese equaling the U.S.

RACHMAN: Well, I mean, actually, boringly, can I agree with you? I mean, I think that, you know, when we talk about the rise of China, I'm not talking about China displacing the U.S. as the most powerful country in the world even when its economy is larger than that of the United States, because there are all these other metrics that you mentioned. But what I do think is that you will see a constraint on American power, growing constraint on American power. So the unipolar moment is over. And I think that the U.S. increasingly will find it difficult to get its way.

Let me give you just a couple of concrete examples. The climate-change talks were a very interesting thing, where America turns up, kind of assumes that the world's democracies will be on its side, and, in fact, you know, when it comes down to it, India, Brazil, they're with China. And those kinds of incidents, I think, will multiply.

NYE: Well, I think we would agree that the unipolar moment is over. I never thought it existed in the first place.

RACHMAN: Right.

NYE: I thought that was a Krauthammer myth, which led us into very deep trouble in Iraq, because people believed it. It's just as great a mistake to believe in American ascension as in American decline. But I do think that the point that is worth remembering is that Asia is not one thing. We're seeing the rise of Asia.

But if you look at Japan, you look at India, you look at Vietnam, these countries want the U.S. That has a huge effect on the balance of power. It's as though Canada and Mexico wanted a Chinese military alliance because of their fear of the U.S. We don't threaten our neighbors because we have soft power along with our hard power. China frightens its neighbors because it isn't able to generate that soft power to go with its hard power.

RACHMAN: I mean, I think that's right, but I think that for the reason I mentioned this divergence between economic and strategic interests, the debate is open and ongoing among the neighbors of China and the allies of the U.S. as to where they look. And I think you could even see it in the past year and a half in Japan, where you have Prime Minister Hatoyama coming in, tilting quote noticeably towards China, then replaced by another prime minister who tilts back to the United States.

And I think you will see more and more of these oscillations, because it's a slightly -- it's a difficult and uncertain position. And since you quoted one Singaporean, I'll quote a more junior one, Kisho Mavobani (ph), who, of course, represents a particular Asian's point of view, but, you know, worth listening to.

And he said to me, "Well, the thing is that we know that we do want America to stay in the region in some ways, but we know that China will still be here in a thousand years' time. We don't know America will still be here in a hundred years' time." And I think that question of can America sustain its presence in the Pacific, because of the kind of financial pressures that Richard and others have written about, is a real live question.

HAASS: Can I just break in here for a second?

NYE: Oh, sorry about that. (Laughs.)

HAASS: This is why -- this is why unemployment is so high, because presiders are now unemployed.

Let's just raise one other part of the world, because so much of this has been about Asia. But so much of the news -- and in some ways, if Asia is the most successful theater of the world, at least the most dynamic, the Middle East is the least successful, and in many ways the least dynamic.

What does that tell us, then, about the future, about diffusion of power, about American -- because China is not a significant presence in the Middle East. On the other hand, what we're seeing in many cases are the limits to American power. Is that not something of a glimpse into the future, where a world of diffused power is much more than a pretty unattractive sight, where you've got some fairly aggressive medium-size states?

You've got all sorts of non-state actors, whether it's the Hezbollahs or al Qaedas that are incredibly dangerous, running amok. Our ability to persuade countries to reform tends to be rebuffed. Our ability to persuade countries to compromise at the negotiating table tends to be rebuffed.

Is this not another vision, if you will, of the future?

NYE: Oh, absolutely. I mean, if -- I mean, this is the point why I stressed diffusion of power rather than transition of power among states as the key question.

If you think of the information revolution, it's quite remarkable. The price of computing power went down a thousand-fold in the last quarter of the 20th century. If the price of an automobile had gone down as rapidly, you could buy a car today for five dollars.

What that means is all sorts of individuals and organizations, non-state organizations, are suddenly empowered. They can do things that previously reserved the governments with big corporations. And that's what we're seeing in the Middle East today. The information revolution has provided more information to more people than any time in history.

And what that's done in the Middle East is good and bad. If, on the optimistic side, the old view we had, which you either had the autocrats or the Islamist extremists -- no, there's a middle. And this profusion of information has created a middle. And what's more, it's provided technology and gadgets so that they now can coordinate, whether it's Twitter or Facebook and so forth, to actually do things.

But that middle is a very diverse group. And how we play this could turn out very bad or very good. So it's not necessarily pure pessimism, but it's not pure optimism either. And it's going to be very difficult for a government -- as we see, as we watch the Obama administration trying to walk this tightrope, you have to deal with the governments and hard power, because they're in power, but you also have to realize it's not just whose army wins; it's whose story wins. You have to have a narrative that reaches civil society at the same time. And walking that tightrope is hard, and we've seen some wobbling.

RACHMAN: Yeah. No, and I think it's a very plastic moment. It could turn out -- it could be the best thing that ever happened to the Middle East if, you know, you do actually get a transition away from these old autocracies. But of course, you know, things could go massively wrong as well. That's obvious.

I think, actually, although, in a way, this has been a demonstration of this kind of new cyber world, I think there's a slight danger of exaggerating it. You know, some of the talk is as if there was never a revolution before Facebook. How did the French storm the Bastille without Twitter? It's incredible. (Laughter.)

HAASS: Le Twitter. (Laughter.)

RACHMAN: But -- so, you know, while it's very interesting the way it's shaping events, you know, revolutions have occurred before. And I think, to make another sort of old-fashioned point, I think it's also a reminder of the importance of states still, because what's the question that's preoccupying us? How is this going to turn out? The question is, who ends up in control of the state? And that's what's making people's hearts flutter in the White House or whatever? That's how we'll, in a way, define how the revolution turned out.

HAASS: If you're talking about this world in the Middle East we just described, it's pretty rough around the edges; more broadly, a world of diffuse power. Are you optimistic about the states and others essentially coming to some sort of understanding or consensus about how to govern it? Do you see -- in general, if you were looking at the trends towards order versus disorder, in terms of what you might call the management of the globe, do you -- I mean, you had the failure at Copenhagen. You've got world trade talks essentially on life support, if that. You've got, at best, half-hearted efforts to deal with North Korea and Iran's nuclear programs. And one could go around some other issues as well.

Do you see grounds for optimism that, as this power builds and spreads -- while this information and other technologies get diffused, what gives you a sense that the world would be better for all this?

NYE: Well, I think it's not automatically going to be better. There are lots of things that can go wrong. But I think it'd be a mistake to assume that it's totally unmanageable. There's a lot more governance -- not government -- governance in the world than we realize. Even the failure at Copenhagen was followed by modest rapprochement at Cancun.

And there is a question of -- I mean, the nonproliferation treaty, we have major challenges from North Korea and Iran. But let's face it. Jack Kennedy said there were going to be 25 nuclear-weapon states by 1975, and, in fact, there are nine.

So, you know, it's glass half-full, half-empty. But I think it's a mistake to say, "Oh, because its power is diffusing, we're all going to hell in a hand basket." A lot will depend on America and American power. This is why the declinist view that we're all finished is so dangerous, because it makes us feel draw inward; don't do anything. If the largest country doesn't take the lead in providing these public goods to deal with these kind of challenges, nobody else will.

HAASS: Right.

NYE: And that's why being accurate about the assessment of American power, neither Pollyannish nor too pessimistic, is essential to deal with the kinds of problems you're talking about.

HAASS: Some would argue -- Mike Mullen was here the other day, the chairman of the Joint Chiefs of Staff, and he has been on the record as saying that the greatest threat to American power is the economic foundations and essentially the debt.

And you've been -- you know, you're at the Kennedy School of Government and you're a keen observer of the American political process. Do you have optimism that this country will, if you will, deal with the debt before the bond market deals with us?

NYE: I -- nobody -- if I knew the answer to that, I'd be very wealthy.

HAASS: But it's still -- none of us knows the answer. The question is --

RACHMAN: The question of the bond market --

NYE: Yeah, but I think not before the 2012 election. But it's interesting, if you look at a longer perspective on American politics, the tea party movement really is at 20 percent which is dedicated to solving the deficit problem. And if you look at the Simpson-Bowles commission, they proposed some very sensible things that can be done.

I think the problem is, how do you put that package together? And probably you're not going to put it together until after the 2012 election. But, you know, in principle, one can see a solution. Will it happen or not? I mean, nobody knows. But I would think that it's in the president's interest to grab this issue and make it his issue in 2012.

HAASS: You're an observer of -- you're not an American, but you're an observer. Sometimes observers see us better than we see ourselves. De Tocqueville and some others had some views about that; Mr. Bryce.

RACHMAN: I'm happy to play de Tocqueville with you. (Laughter.)

HAASS: So looking at us, do you share Professor Nye's optimism that essentially, two years down the road, we're more likely or at least fairly likely to get our domestic house in order?

RACHMAN: Well, look, I'm sort of -- if I think about modern-day politics, it makes me kind of pessimistic. If I think about the kind of sweep of history, I'm more optimistic. And what I mean by that is you look at the mess in Washington, the polarization of the debate, it does look pretty hopeless. I can't see them reaching some sort of agreement to reduce the deficit.

It may be that America, you know, has more time before the bond markets reap revenge on it. I mean, if you look, the Japanese seem to have managed to get to some incredible level of debt-to-GDP ratio. They're still going. So -- but what I mean about being optimistic about the great sweep of history is that although, you know, my book has plenty of gloom in it, I did, at the end, try to draw back and remember that, you know, there have been other big crises of liberal economies and liberal politics, most notably the 1930s, you know, when things were much, much worse economically, when the threats overseas were much worse. And many people did say, you know, actually, liberal democracy doesn't work, I mean, even in our own societies, and moved off to the extremes. And actually, in the end, they were wrong.

So, you know, one has to kind of keep the faith, even if you can't quite see your way through within the next three to five years.

HAASS: Well, on these positive notes, let me open it up. If you'd raise your hand, wait for a microphone, and then identify yourself. And please keep your questions to a single one and be succinct. We would be forever grateful.

Yes, sir.

QUESTIONER: Hi. My name is Khalid Azim.

Is there such a thing as moral power? And, if so, does the U.S. have it?

NYE: Well, my view is clearly yes, that -- in both senses, that there is moral power. That's what I mean when I talk about soft power. Power is the ability to get others to do what you want. You can do it through coercion -- sticks -- payments -- carrots -- or traction and persuasion. And having a moral position moves people. It attracts them. It persuades them. When we live up to our ideals, which we don't always, we do indeed have that moral power. And that's what soft power is about.

RACHMAN: Can I just quickly answer that? I mean, I think that -- I think -- I agree that America does have enormous moral power. I think there's -- one thing we might underestimate, though, is the extent to which the Chinese have some of that as well.

I mean, I think one of the interesting things at Copenhagen was the way they were able to position themselves as the spokespeople of the developing world, to say, "Look, you guys consume this enormous amount of energy and you're now saying to us we can't aspire to the same sorts of lifestyles as you. Who are you to say that?" And that had a big resonance.

HAASS: All the way in the back. Is that Mr. Rubin?

QUESTIONER: Yes.

Thank you, Richard.

I guess this is more for Gideon than Joe, but if you could both address it. Why, in drawing a straight line of Chinese growth in the economic side, you don't take into account the many people who believe that China's ability to stay stable politically takes a big chunk out of that straight line and raises very serious questions when you throw out where China will be in 20 years economically?

Using a statistic about economics, there's a whole bunch of other factors, including the huge labor unrest and the battles against the center and all of those things. So could you address the stability of China and how that would factor into this straight line of economic growth? Thank you.

RACHMAN: That's obviously an incredibly important point. And you're right; straight-line projections are usually wrong. And China has enormous problems in environmental, political transitions to go through.

However, you know, I don't think that even if one factors in a great deal of instability in China, that will be enough to kind of -- I mean, we, in 10 years' time, 15 years' time, say, "What were we thinking about when we thought China would be a great power?" They may be a very troubled power, and their growth may slow down. But simply given the size of the country and the momentum of economic growth over the last 30 years, I think they will be bigger players in the future.

Just to give you an analogy, I mean, if you look at the rise of Germany in the 1870s -- I don't mean that this means war, but in an economic sense, you know, this is a country that goes through enormous turmoil. They go through the defeat in the First World War, hyperinflation, Great Depression, Second World War. By the 1950s, they're actually still one of the most developed economies in the world.

So you can have enormous instability. But if you've got a country that's somehow got the hang of economic growth, is quite large, is quite productive, it doesn't mean that the whole thing gets derailed at some point.

HAASS: All the way in the back. Yes, sir.

QUESTIONER: Professor Nye --

HAASS: You have to introduce yourself.

QUESTIONER: Chung Weihua (ph).

Professor Nye, I'm wondering if you graded Obama demonstration in how it uses power, according to what you said in the book. What score you would give in its dealing with Egypt in the past two weeks and in dealing with China in the past year?

NYE: Well, I think when Obama came into power, he had to restore the loss of American soft power that had occurred in the Bush years. This is not a political judgment. It's simply reporting what polls say. And Hillary Clinton talked about smart power, which is the ability to do both hard and soft power.

Obama gave a series of speeches in Turkey, Cairo, to the U.N. and elsewhere, and tried to restore that soft power. And the polls show that some of that worked. But when you look at the longer term, you have to ask, do the actions reinforce the words? And some of these, it's too soon to know.

I think, frankly, when the Obama administration came into office in relation to China, they were a little bit too naive, too optimistic. The Chinese, in fact, thought the Americans were in decline. So as Obama tried to compromise with China, they basically thought, "Ah, it proves our point. The Americans are in decline." I think the net effect of that was bad for China. Its hubris led it to spoil its relations with Japan, Vietnam and India, and also with the United States. I hope that's now rectified after the Hu Jintao visit and that China is back to the old Deng Xiaoping advice of keep a low profile.

On Egypt, I think they're wrestling with this dilemma I described earlier, which is how do you use this soft power that was expressed in the Cairo speech while also realizing that when you're talking about balancing Iranian power or preserving the peace process and not seeing a war with Israel, you've got to deal with the government.

And that is a very difficult tightrope to walk on so that you're dealing with government, which is essential for the hard power, but also creating a narrative so you don't alienate civil society, which is the source of stability and attraction for the long run. And I think they've wobbled a bit on that tightrope, but, in my opinion, they haven't yet fallen off.

HAASS: Sir.

QUESTIONER: Stephen Black (sp).

The United States exercises enormous power -- you might call it dumb power, perhaps -- by being the largest debtor, having the largest and richest markets, being the largest consumer. If the United States -- as the fat boy in the boat, if the United States doesn't take the most active leadership in global governance, is there a formula to maintain or to create stable global governance without the U.S. taking the leadership role?

RACHMAN: Well, I mean, I think, you know, we referred to this before, that obviously the U.S. is the most plausible leader. I mean, I think one of the reasons that the G-20 is now a slightly troubled organization is because America is the only obvious leader, but it's not quite powerful enough.

And so, you know, at the time of the financial crisis, everybody said -- the analogy people looked for was the new Bretton Woods. They said, "We need a new Bretton Woods." And yet if you look back at the situation when Bretton Woods happened, the U.S. was incomparably the most powerful country in the world. Essentially -- I mean, if you read the Skidelsky book on Keynes, the Americans basically designed the institutions and then were able to impose them on everyone, including the British, who, although they didn't much like it, weren't in a position to fight back.

And I think that in this current situation, America is the most powerful country in the world, but it's not able to push everybody in the way that it was, say, at the time of Bretton Woods. So you tend to get deadlock, you know, on a number of issues -- climate change, global economic imbalances.

The most they'll do is they'll agree they need to agree, but they can't get there, because the national interests come into play, so that although there's a recognition that there's a common problem that can only be solved internationally -- and that is a good starting point on a range of issues -- when they actually get down to discussing the nuts and bolts -- as I say, climate change, global economic imbalances, nuclear proliferation -- people's interests come to the fore and then they get deadlock and you don't get an agreement.

NYE: Let me just agree with what Gideon just said, but also warn us all against what I call the golden glow of the past. In 1945 to '50, Americans had a nuclear monopoly and nearly half of world product, and yet we still weren't able to prevent the so-called loss of China or to win the Korean War. So this idea that once we were this hegemon that could do whatever we wanted, and today we're down in this poor --

HAASS: That was the first unipolar --

NYE: Yeah, this is the golden glow of history.

HAASS: Sure, all the way in the back.

QUESTIONER: Thank you very much. Mahesh Kotecha.

You know, my question is, what is the great benefit of being the hegemon? And what's wrong with having multipolar world? We believe in the U.S. in checks and balances. Why not worldwide?

NYE: Well, in my book, I argue that power isn't good or bad per se. It's like calories in your diet. Too much is bad for you. Not enough is bad for you. And so the idea -- I don't think the United States should try to be a hegemon. I think it's a terribly imprecise and rather useless and confusing word.

But I do think that if the largest country doesn't help to take the lead in organizing others to produce public goods, it's very hard to see smaller countries doing it. So why should we concern ourselves about American power? Not to be able to say, "I'm number one." It's not a Super Bowl. It's a question of can you produce the kind of order, faced with the diffusion of power that Richard talked about. And without the United States working on that, I don't see other countries being able to do it.

HAASS: Why is that? Why is it other countries can't do it or won't do it? Why is it that the United States is one of the rare countries that thinks in those kind of global -- what you academics would call global public goods and things like that? And the Chinas and the Indias and even Europes at times don't think in those terms. What's it about this country?

NYE: Well, it's not about this country. Actually, the theory of collective action or public good, as Mancur Olson points out, that when you have a large number, it's a lot easier to free ride rather than bear the burden. The reason the largest bears the burden is because they're going to see the benefits of the burden. For the small, their actions are so insignificant that it's easier to free ride.

China is now getting to a position analogous to where the United States was back in the 1920s and '30s. After Britain no longer was providing these goods, Americans were free riders. It's not our culture. We used to love to free ride. And it produced the '30s and World War II.

So what we've got to do now is get the Chinese and others to start pulling their share.

RACHMAN: I mean, I think that it's interesting. There's divergence of opinion in Europe, I think, between elites and the public as to whether we actually want to be a major power. So you go to Brussels and they say, "Well, we must mobilize our power and we must -- you know, it's terrible that Europe's not more of a player in the world."

But actually, one of the reasons Europe's not more of a player in the world is that there is no constituency for, say, increased military spending. Europe wants to just kind of put the blanket over its head. And it was sort of summed up for me where actually I saw a French civil servant. There was a discussion of the kind of rising tensions in the Pacific. And the French civil servant asked the Chinese diplomat there, "What is Europe's role in there? Are we irrelevant?" And then he said, "I hope the answer is yes," because he didn't -- you know, "It suits us to let the Americans kind of look after it."

HAASS: Lots of hands. Sure.

QUESTIONER: Thank you.

We've spoken a lot about --

HAASS: Introduce yourself so we all know who you are.

QUESTIONER: Sorry. Matt Hooper (sp).

We've spoken a lot about the rise of the East, but I'm also curious about power diffusion, which Professor Nye mentioned earlier. What are your short-term thoughts -- next two years, three years -- when governments can still so quickly control things like the Internet, not necessarily our long-term implications, but how are these next few years going to be affected by this government-Worldwide Web relationship?

NYE: Well, I have a chapter in my book on cyber power. And what it points out, that it's a mistake to be a cyber optimist or libertarian, the view that it's transforming the world. Governments are still able to control the Internet, but it gets leakier and leakier. Egypt shut off the Internet at considerable expense. I mean, if you want to run a banking system or a trade system, you pay a high price when you do that.

But there are a lot of sources of information. Land lines weren't cut off, and you could also pick up a cell phone and use this device "Speak to Tweet," so you called a number in Europe or elsewhere and you were able then to get a Twitter account and a tweet on the Internet.

So the point is that there are ways to work around this. Governments still have sovereign power over the parts of the Internet that are within their borders, and it's silly to think that that is gone. But it's getting leakier and leakier. Even the great fire wall of China is getting leakier.

HAASS: Sure.

QUESTIONER: Nick Branford (sp), Lazard.

How do you think the West should handle Iran?

NYE: Your turn. (Laughter.)

RACHMAN: Thank you.

HAASS: Deftly, I think, is the word.

RACHMAN: Well, you know, I'm not privy to the intelligence. There's this endless debate, you know, about how close are they to the bomb. I mean, I think I've been hearing for the last 10 years they're one or two years away and that now there are people actually saying they've been very seriously disrupted by Stuxnet and so on. So a lot depends on that question, which, you know, I don't have the answer to.

I mean, if you think that they're a few years away perhaps because of the cyber disruption, then the only sensible thing to do is to play for time. We now know, because of the aborted green revolution, this is an unstable country, a country that could change, or the regime is unstable. You know, clearly we don't want a military conflict with them if it can be avoided at all.

So I think you just monitor them and cross your fingers that the country changes.

HAASS: I'm not only calling on men, but so far, at least, not one woman has raised her hand since this meeting began. So I know I'm going to get criticized afterwards for my selection bias, but I want to point out that it's not a selection bias. It's a --

NYE: There we go.

HAASS: (Laughs.)

QUESTIONER: Min Tufain (sp) with the U.N. Foundation.

You mentioned earlier, Mr. Nye, about -- Professor Nye -- that maybe it's not part of the U.S. culture to take the lead in the world and that we have been a free rider in the past. Well, what about American exceptionalism? Is that something that we need to -- do we need to have that sense for us to lead in the world?

NYE: American exceptionalism is interesting. In one sense, President Obama is right that every country thinks it's exceptional. But it's also true that American exceptionalism really goes back to our founding. I mean, you know, the city on the hill, which Reagan transformed into shining city on the hill, was John Winthrop.

I mean, this is 17th century. We believe that we've broken away from that bad old world back there in Europe. Remember, these were British colonists who believed that, because of -- let me call them strange religious beliefs, but whatever. I happen to come from a Puritan background. My family got here in 1639, so I can criticize these people. (Laughter.)

But they had very odd, in the Church of England sense, religious beliefs. And we were exceptionalists in that sense. And that has its bad side. It makes us think we're holier than thou or better than others. It also has its good side. It means that we think we have to stand for human rights and liberty, that there is something about us that, even though we don't always live up to it, we have to keep it. And that's the source of our soft power.

Think back to the Vietnam period, when people were demonstrating in the streets around the world against America, and people thought America was absolutely terrible. What were the demonstrators singing? Not the Internationale of the communists -- Martin Luther King's "We Shall Overcome." That's real soft power. And that grows out of American exceptionalism.

HAASS: Sure.

QUESTIONER: Hi. Lane Greene from The Economist. Hi, Gideon.

HAASS: I think The Economist should ask the Financial Times a question. (Laughter.)

QUESTIONER: I apologize --

RACHMAN: (Inaudible) -- The Economist.

NYE: Let's get ugly here.

QUESTIONER: A long-time correspondent of The Economist, but my question is for Professor Nye. Catch you later, Gideon. (Laughter.)

My question is about -- we've talked about soft power a lot. And the word public good, the phrase public good, has come up quite a bit. And the Internet has been talked about quite a bit as well. We've given -- we've diffused more power, the United States has, by the creation of the Internet and the Worldwide Web, and even now Facebook and Twitter.

Do foreigners think about these as American products when they get on them, whether to communicate with one another not about America, or when they get on these products to take up cyber arms against America? Why doesn't our gift of this diffusion of power to the world redound to our credit more than it actually does?

NYE: Well, I should be very nice in answering The Economist's question, since you called my book "rigorous and convincing." (Laughter.)

HAASS: We'll see if your answer is now.

NYE: I think the danger is thinking that somehow cyber is all good. It's good and it's bad. I mean, it can be used for malevolence against us. It can also be used for Internet freedom, which I think, in the long run, helps us.

One problem for American policy is we haven't quite figured out how to deal with this. Hillary Clinton gave a wonderful speech last January after the problem between China and Google about how we stood for Internet freedom. And then along comes Wikileaks and we want to censor. You know, we haven't figured out how we fit all this together. Unless we have a more consistent narrative on our own sense, we're not going to succeed as we need to in this cyber world.

HAASS: We're actually doing some interesting work here at the Council on just this. What would be the rules that govern, if you will, this new space, literally and figuratively? Because you're right. Like all technologies, there's positive and negative aspects. There's offense. There's defense. And it really is probably one of the most unregulated frontiers out there. So we're all playing catch-up, not to be confused with ketchup.

Sir.

QUESTIONER: Anton Kuslonov (sp) with TIAA-Cref.

Coming back to the discussion on economic policy, we have a very interesting juxtaposition with discussions in the U.S. whether we should cut the deficit and sort of like going to economic austerity, while at the same time in the U.K. that's actually in the process of being implemented.

And so how do you gentlemen see that development taking place in the next couple of years? And what can we learn from each other?

RACHMAN: Well, I mean, it's quite early days in Britain. And we got a bit of a fright, because the last quarter GDP figures were really bad. The economy actually shrank. And so there is anxiety that maybe they are cutting too fast. I think Britain's cutting faster even than Greece, which is quite remarkable.

On the other hand, you know, we -- the argument the government makes, and maybe they're right, is that we can't afford to be as relaxed as the United States are, because we don't have a reserve currency. You know, we're that much more vulnerable to the markets. And yet the Labour Party, the opposition, actually do look to the U.S. and say, "Look, why are we pursuing this kind of crazy policy when the Americans are correctly continuing with something that looks more Keynesian?" although the tap's been turned off a bit.

So, yeah, you know, if you're a disinterested observer -- the Chinese, perhaps -- it will be a very interesting controlled experiment to see who gets it right.

HAASS: Two very different economic approaches, two very different political models.

Sure, Rick. I'm sorry, go ahead. Yes, sir.

QUESTIONER: Alfred Youngwood.

A simple question. Egypt -- any words of wisdom?

RACHMAN: Okay, you gave me Iran. You can have this one.

NYE: (Laughs.) I think that what Hillary Clinton said at the Munich security conference last weekend is right as a general attitude toward American policy. We would like to see an orderly transition to democracy. Now, it's a lot easier to say that as your slogan than it is to figure out how to do it.

I'm not a great expert on Egypt or the Middle East, but I think what it's going to require is some form of giving away -- or Mubarak might be able to transfer his power, as he's done in the past, when he was ill, to somebody, so that you don't trigger this clause which makes an election -- the speaker becomes the head of the government, and then you immediately have an election, which I think it's much too early for an election.

I think if you can get rid of the emergency law and get rid of some of the bad aspects of the constitution by having a constitutional convention or a body which changes it, and create a constitutional structure in which you then can try to build some parties, then you might have the chance to make progress toward an election at some point.

Notice, all these are big ifs, and it's a lot easier to say that this is a path than it is to actually carry it out and do it. But again, I mean, the current situation in Egypt could go either direction. There's a new middle, and that middle includes some good things and some bad things. And trying to figure out how we work with that middle, and at the same time work with the existing government, which we have to do, is very hard.

So Hillary's slogan, you know, "an orderly transition to democracy," is the right attitude. The details of implementing that are very hard.

HAASS: Let me ask a related question, though, which is, in this world of diffuse power, relative American decline but still significant capability to effective ends, to what extent is it -- should it be a necessity? Should it be a priority? Is it simply desirable? Is it none of the above that the promotion of democracy inform U.S. foreign policy? How should we think about that? Or should we mainly focus on how countries essentially act beyond their borders? How do we think about this question?

NYE: Well, we went through a period under the Bush administration where excessive zeal for the promotion of democracy contributed to what somebody once called a war of choice --

HAASS: A wise person.

NYE: -- rather than a war of necessity. And we paid a heavy price for it. And in a sense, it discredited the idea of democracy promotion.

If you think of democracy as something which is in our interest in the long run, but getting there often can lead to problems for us, I think trying to get that balance where you attract people to democracy rather than compel people to democracy is the right attitude.

So I think the way the administration has handled affairs in Egypt, like, for example, using both our hard power of aid and our soft power of close relations with the Egyptian military, to say, "Don't shoot these protesters," I think that's correct, and that's a proper use of power. But if we were to say, "Elections now," or, you know -- I mean, that would be the kind of mistake we made in Iraq.

So somewhere in between those two, there is a way of threading this needle.

HAASS: Yes, ma'am.

QUESTIONER: Catherine Lancaster (sp).

I'm wondering if -- does the U.S.'s ability to exercise soft power rely on people wanting to be like the U.S.? And, if so, does our current ability to -- our inability to get our house in order, with the tea party, with the economy, will that weaken our soft power going forward?

NYE: Well, I'd like to hear Gideon -- I'll answer that, but I think it'd be interesting to have a non-American answer to that as well.

RACHMAN: Well, also, I mean, I think foreigners have quite a nuanced view of America. They see a lot of America. And I think that, you know, it depends which America they're reacting to, so that, you know, if you look at European reactions to the U.S., there was a kind of euphoric reception to Obama because he was the anti-Bush. He was the America they liked, and Bush was the American that they don't like. And now the least popular American in Europe is Sarah Palin.

So there are aspects of the United States that Europeans and, I think, others as well find kind of a bit scary, kind of nationalistic, et cetera. And there are aspects of America that are still immensely attractive. It slightly depends which are accented.

On the question of the competence of the United States, yeah, I think that is part of the whole soft-power question. You know, I think that if America appears kind of deeply troubled, unable to get its own house in order, then some of those values that you talk about promoting, like democracy promotion, the promotion of free markets, you know, people say, "Well, hang on. Why are we listening to this?"

And again, there's a possibly apocryphal story where I think some Chinese official said, you know, "Just to think that Hank Paulson used to come here and give us lectures, you know, on how to order our affairs, and now look at them." So that is a danger.

NYE: Let me just add -- I mean, I agree with what Gideon just said. Let me add to that.

The United States suffered a blow to its soft power by the mess it made in 2008, particularly our preaching at others about how great we knew how to run a financial system. I mean, it was a real blow to Wall Street's soft power. But if that were all there were to American soft power, then I would really be worried.

Let me point out something else, which was a conversation that I had with probably the second most powerful person in the British government in the fall of 2008, after the collapse, but also after the election. He said, "You know, it's fascinating." He said, "Last year the conventional wisdom was you had to have a family fortune or a lot of money and you had to be part of a family dynasty or a big-name dynasty, and American democracy was corrupted and there wasn't -- you know, the system was terrible."

He said, "Then you went and you elected an African-American with a funny name who had no family money or big sources of money to begin with." He said, "All of a sudden you changed the way the world looked at America." He said, "That is where America's soft power comes from."

So, yeah, we're very messy. The closer up you look at us, at our political process, the messier it is. But if we can keep that larger, to quote Reagan, "shining city on a hill," then I think we're going to come through it okay.

RACHMAN: Could I just add a sentence on that? I mean, I think it's relevant to Egypt, these two views of America that are competing, and it (meant ?) often the same mind, so that if the Egyptian people in the street look at America, in some sense it's an inspiration, as the land of Facebook and so on, as the land where you do have free elections.

On the other hand, there's the America that's been propping up Mubarak for 30 years. Actually, they both exist. And which of those two narratives prevails, I think, is really important to how Egypt turns out.

HAASS: Alas -- and I want to apologize for those I didn't call on -- we've about run out our string.

I've got two housekeeping things to do. One is two upcoming meetings I want to let you all know. Tomorrow morning we've got a meeting here at breakfast with Ken Rogoff, who's published by far the most successful economics book in recent times, and Raghuram Rajan to talk about currency wars as part of our McKenzie (sp) series. And that runs from 7:45 to 9:00. Now, if you do want to go to that, you still have to go home tonight. (Laughter.)

And then, in about a week's time, on February 15th, on Tuesday evening, we're going to be marking the 20th anniversary of the Gulf War and Operation Desert Storm. And people such as Brent Scowcroft, Paul Wolfowitz and yours truly will gather in Washington, but New York members will have a chance to hear us essentially reminisce and reflect upon the lessons, what we got right and what we got wrong in that experience.

Again, what you've heard here tonight are two people who I think did one of the most important things in the business, which is they wrote big books. I don't mean big in the sense of telephone; I mean big in the sense of ideas. These are books that essentially grapple with the international system as it is evolving. And whether you agree or not is almost secondary. You learn a lot. These are rich -- these are rich efforts.

So I want to thank Joe Nye, the author of "The Future of Power," Gideon Rachman, the author of "Zero-Sum Future." Again, the books are out there. If you get them, you will stimulate the economy, or certainly their economies. And I want to --

NYE: Help the British economy.

RACHMAN: Exactly. We're in desperate straits.

HAASS: I want to thank them, and I also want to thank you for coming. (Applause.)

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